Incidents:

The company announced its 2019 annual report. For the full year of 2019, the company achieved operating income of 2,206 million yuan, an increase of 56.23% over the previous year, and achieved net profit of 280 million yuan to the mother, an increase of 83.46% over the previous year, corresponding to earnings per share (diluted) of 0.28 yuan. The company announced its report for the first quarter of 2020, which currently achieved operating income of 439 million yuan, an increase of 52.79% over the previous year, and achieved net profit of 31 million yuan to the mother, a decrease of 23.32% over the previous year, corresponding to earnings per share (diluted) of 0.03 yuan for the current period.

Comment:

1. Annual report performance is growing rapidly, and I am optimistic that the company's military electronics business will develop positively over the long term.

On the revenue side, the company's military electronics business grew rapidly by 42.74% year-on-year, due to accelerated assembly and delivery of key weapons and equipment, while military reform entered mid- to late-stage order resiliency and compensatory growth. Among them, microwave circuits, components, and semiconductor devices were +50.59% and +87.99%, respectively; shipbuilding business rose slightly, with commercial boat product revenue +25.51% year on year, partially offsetting the impact of special boat revenue of -4.86% year on year. On the profit side, Guimu's net profit was +83.46% over the same period, which was significantly higher than the revenue growth rate due to: ① The company strictly controlled expenses during the reporting period, and the cost rate for the period (excluding R&D) was reduced by 3.62 pct to 11.22%. ② Income tax expenses were reduced from 42 million yuan in the previous period to -91 million yuan in the current period, that is, this contributed 134 million yuan of after-tax profit to the company compared to last year; of these, the current period recovered the income tax expenses already accrued by Chengdu Yaguang Electronics in 2018, resulting in current income tax expenses of 33 million yuan; Chengdu Yaguang Guarantee's loss of deferred income tax assets that can be deducted from taxable income in the future increased 362.96% at the end of the period compared to the beginning of the period, causing deferred income tax expenses for the current period to be -59 million yuan; ③ The above two reasons were partially offset by shipbuilding due to shipbuilding's deferred income tax expenses; The above two reasons were partially offset by shipbuilding, military electronics The negative impact of the decline in gross margin on the company's performance (gross margin decreased by -10.90 pct and 5.45 pct respectively in the current period, which reduced the overall gross margin of the current period by 9.46 pct). The company's revenue continued to grow rapidly in the first quarter (up 52.79% year on year), but due to lower gross margin (-9.87pct) and large losses in the company's shipping business affected by the pandemic, the company's net profit for the same period decreased 23.32% year-on-year.

2. Core logic: Yaguang Electronics, a subsidiary of the company, is one of the main suppliers of domestic military microwave circuits and devices. Its products are used in fields where product reliability is extremely high, such as space-borne, airborne, shipborne and ammunition. It has accumulated strong technical strength and customer resources, and competitive barriers are stable. In the context of deepening the field of electronic warfare, the acceleration of military combat integration and the development of the Tiandi Integrated Constellation Internet, the company is expected to fully benefit as a core spare parts supplier. Furthermore, in recent years, the company has used 5G/6G RF front-end chips and optical communication chips as breakthroughs to accelerate the expansion of consumer chip design services. The vast field of civilian RF microwaves is expected to become a new performance point in the future.

3. Profit forecast: Optimistic about the company's military electronics business to benefit from the vast space for informatization development and potential growth potential for civilian goods, give the company a “recommended” rating. Our EPS forecast for 2020/21/22 is 0.34/0.45/0.58 yuan respectively, corresponding to 2020/21/22 PE of 34/25/20 times.

Risk warning: the informatization construction process falls short of expectations, orders and delivery of highly reliable products do not meet expectations; impact of the epidemic, etc.