Event: the company released its annual report for 2019 and quarterly report for 2020 on April 30. In 2019, the company achieved revenue of 1.125 billion (+ 13.16%), net profit of 137 million (+ 0.19%), gross profit of 44.09% (+ 0.29pcts) and net profit of 13.49% (- 1.45pcts). 2020Q1 achieved revenue of 133 million (- 23.25%), net profit of 18 million (+ 14.07%) and gross profit margin of 52.43% (+ 6.32pct).

Main points of investment:

The five major business groups have developed steadily, with both military and civilian development: Leike Defense has complete independent intellectual property rights, covering radar systems, intelligent ammunition, satellite applications, secure storage, intelligent network connection and other industrial directions. The company's main products can be divided into five business groups: ① radar system, ② intelligent ammunition, ③ satellite applications, ④ security storage, ⑤ intelligent network connection. From a product point of view: in 2019, radar systems (subsidiary science and technology Leike) achieved revenue of 268 million (+ 3.27%), accounting for 23.85% of business; satellite applications (subsidiary science and engineering Leike, Chengdu Aicote) achieved revenue of 467 million (+ 22.31%), business accounted for 41.54%; intelligent ammunition (subsidiary Xi'an Qiwei Technology) achieved revenue of 191 million (+ 30.80%), accounting for 17.01% of business. Secure storage (subsidiary Xi'an Qiwei Technology) achieved revenue of 186 million (- 7.47%), accounting for 16.52% of the business. In 2019, the military industry will enter a critical period of equipment upgrading, the pattern of military-civilian integration has ushered in a year of continuous deepening, and the national strategy of innovation-driven development has become more deep. radar systems, satellite applications, and secure storage business groups have completed the research and development of military and civilian core products and put them into the market; smart ammunition has made progress in both domestic and foreign markets. The intelligent network connection service group has obtained a number of demonstration projects to be carried out gradually.

The gross profit margin is basically stable, and the R & D investment is increasing year by year: on the operating side, the company's comprehensive gross profit margin in 2019 is 44.09% (+ 0.29pcts). In terms of products, the gross profit margin of radar system is 42.33% (- 2.94pcts); that of satellite applications is 47.28% (+ 1.13pcts); and that of smart ammunition is 67.84% (- 4.22pcts). The gross margin of safe storage is 16.79% (- 1.24pcts). Overall, the gross margin remains basically stable. On the expense side, in 2019, the company's sales expenses were 26.9677 million (+ 8.94%); management expenses were 161 million (+ 1.21%); and financial expenses were 13.9873 million (+ 4710.90%). The sharp increase in financial expenses is mainly due to the increase in the use of credit and the decrease in income from corporate financial products. The company attaches great importance to technology and product R & D innovation, and the proportion of R & D investment in the company's operating income is increasing year by year. In 2019, the company invested 122 million in R & D, accounting for 10.84% of the operating income.

Radar business military products deepen, civilian products achieve batch supply: in terms of military products, the company's radar continues to deepen in the military market, special radar models are put into mass production, and key models have made technological breakthroughs, among which, a certain military high-resolution special millimeter wave radar, after years of continuous research and development and updating, successfully completed the finalization, and began batch delivery this year. In terms of civilian products, the company's radar products have been expanded in many key industries of the national economy, and have entered the market in the fields of disasters, land, transportation, automobiles and so on. Automotive field: 77GHz vehicle-mounted high-precision millimeter wave radar achieved mass production and batch supply at the beginning of 2019, and cooperated with BYD, Changan, BAIC and other automobile companies. Land field: the geological hazard monitoring radar of Suzhou Science and Technology Leike Sensing Technology Co., Ltd. is the first independently developed geological hazard monitoring radar in China. At present, the products have been put on the market and are deployed in open-pit mines and geological hazard monitoring sites in more than 10 provinces and autonomous regions. Transportation field: as the core radar sensor supplier, Suzhou Science and Technology Reko participated in the construction of the FOD (airport runway foreign matter) detection system of the second Civil Aviation Institute in Daxing Airport.

The foreign trade version of smart ammunition is stereotyped, aiming at overseas markets: in the field of smart ammunition, the company attacks both domestic and international markets. At the system level, the product technology of the remote control weapons station has been further upgraded and finalized, and customers have been continuously equipped in batches. a series of products will be developed according to customer needs in the future. at the same time, the foreign trade version will be finalized and begin to open up overseas markets. In the aspect of subsystem, the millimeter waveguide seeker has completed the scientific research stereotype and achieved batch delivery. the company has cooperated deeply with the research institute of the Arms Group to carry out the joint development of cruise missile and millimeter waveguide seeker aiming at the military trade market and the internal market. In terms of core components, the index of strapdown image seeker developed by the company is leading in China, and the products are delivered in batches. All kinds of core components are delivered in batches throughout the year, totaling more than 5000 sets.

The first spaceborne anti-radiation SAR chip has been successfully developed, and Beidou navigation business has developed steadily: in 2019, the company continued to maintain a leading position in the field of on-board real-time processing, while in the field of on-board real-time processing, the company has traditional advantages, and the first spaceborne anti-radiation SAR chip has been successfully developed to fill the domestic gap. In the field of ground remote sensing, the company participates in the construction of many large-scale ground remote sensing measurement and control stations, involving national defense, aerospace, space infrastructure and other fields; the acceptance and delivery of an overseas ground station project has been completed successfully, which is the first overseas remote sensing ground product delivered by our company; embedded satellite remote sensing data processing equipment is used on the Antarctic polar research ship "Xuelong" in China. In the field of Beidou navigation, the company mainly focuses on high-precision Beidou satellite navigation applications, providing core baseband chips, modules, machines and application systems and other products and services. In 2019, the company obtained more than 10 model projects in the military field, and realized the transfer and transformation of product technology in the field of civilian products, and integrated radar technology into the field of intelligent unmanned mines.

Military informationization continues to advance, and security storage products are autonomous and controllable: China has entered a new stage of information development marked by domestic substitution and Anke. The company's independent research and development of national production independent controllable storage array has been successfully incorporated into the military's independent controllable list, and has covered high, medium and low-end military industrial grade storage products. In 2019, the company officially sold 28nm autonomous controllable PCIe SSD controller chips. Marks the company to enter the hundreds of billions of independent controllable market.

2020Q1's revenue declined, and the performance commitment of the target of epitaxial acquisition: 2020Q1 realized revenue of 133 million (- 23.25%), net profit of 18 million (+ 14.07%) and gross profit margin of 52.43% (+ 6.32pct). 2020Q1 inventory 584 million, a month-on-month increase of 22.90%, in the context of declining revenue inventory continues to rise, is expected to be due to delivery delays, with the improvement of the epidemic is expected that inventory can be cashed into performance. According to the company's quarterly report, in 2019, the company purchased 100% shares in Xi'an Hengda and Jiangsu Hengda at 625 million consideration by issuing shares, convertible bonds and paying cash to the other party. At the same time, the company intends to raise no more than 397 million yuan from no more than 10 specific investors in non-public issuance of shares and convertible bonds. According to the report, the underlying assets in 2019. The net profit realized in 2020 and 2021 is not less than RMB 40 million, 52 million and 65 million. In terms of actual completion, the net profit of the underlying assets acquired by the company in 2019 after deducting the impact of share payment fees is 48.032 million, fulfilling the 2019 performance commitment. We believe that the acquisition of Hengda Microwave will expand the existing business, improve the layout of the company's military electronics industry chain, and thicken the company's performance in the future.

Investment suggestions: we believe that the military industry will enter a critical period of equipment upgrading, the 13th five-year Plan is about to enter the final year, and the trend of self-control and military industry informatization is relatively clear. The world arms trade market has maintained an overall upward trend in recent years, which may promote the company's smart ammunition revenue to become a growth point. The company's five major business groups are developing steadily, at the same time, the company actively carries out epitaxial mergers and acquisitions, cuts into the field of microwave devices, constantly improves the upstream and downstream industrial chain, and has a good performance in 2019. We forecast that the company's net profit in 2020, 2021 and 2022 is 234 million yuan, 332 million yuan and 376 million yuan respectively, and the EPS is 0.21,0.30,0.34 yuan respectively. The current share price corresponds to 38.25,27.01,23.81 times of PE, respectively, maintaining the "hold" rating.

Risk tips: military orders are lower than expected; the resumption of work is delayed due to the epidemic; and the future performance of the acquisition target is not as good as expected.