Yaguang Technology and Ziguang Guowei are on the same highly popular military chip circuit. Yaguang Technology is one of the largest microwave semiconductor devices and microwave circuit military enterprises in China. Its military chip function is to receive and process microwave signals, and Ziguang Guowei uses digital chips to complete digital processing, so the prosperity at the logical level of the industry is consistent.
From 2018 to 2019, Yaguang Electronics achieved net profit of 230,000 to 320 million yuan, with year-on-year growth rates of 36.8% and 42.7% respectively. We expect the compound growth rate of Yaguang Technology's military chip business to reach 50% in the next 5 years. Its rapid growth logic stems from:
1) Based on the three fastest growing military tracks: missiles, satellites, and radars. Missiles: The current market size is expected to be 100 billion yuan, with a compound growth rate of more than 30% over the next 5 years. The rapid growth stems from increased strategic reserves and practical training. SATELLITE: Satellite internet is related to next-generation communication technology competition and national security. It is of great strategic importance. The scarcity of low-orbit satellite resources will force China to speed up the construction of low-orbit satellites. It is estimated that the market space for satellite manufacturing in China will reach 55 billion yuan in the next 5 years. Radar: An indispensable component of all kinds of advanced combat platforms. It is a necessary means to achieve long-range attacks and precise strikes. It is a multiplier for exploiting its combat effectiveness, and will also be in a stage of rapid growth.
2) Currently, it only accounts for 2.5% of the military microwave circuit market, and the market share is expected to increase. According to estimates of the usage of national defense information technology equipment and military microwave circuits, China's military microwave circuit market is currently around 40 billion yuan, and Yaguang Electronics's market share is only 2.5%, ranking third; the top 2, CLP Electronics 13/55 is mainly solving advanced technology, so if future military microwave circuits are calculated at a 30% compound growth rate in the next 10 years, they will reach 550 billion yuan in 2030. If YAGOELECTRONICS reaches a 5% market share, its revenue scale will reach 27.5 billion yuan, a significant increase.
3) The penetration rate of national defense and military equipment informatization continues to increase, and military integrated circuits will be significantly higher than the growth rate of the overall military industry. Take radar as an example. Its technology is constantly being iterated, accuracy is getting higher and higher, and integrated circuits are being used more and more. The double increase in the informatization rate and localization rate of defense equipment is the main reason why the growth rate of military integrated circuits is higher than that of the industry.
Investment advice: Relying on the reasons for the rapid growth of the three military microwave circuits mentioned above, we expect Yaguang Technology's net profit of military chips from 2020 to 2022 to be 4.0, 6.0, and 90 billion yuan respectively, with a compound growth rate of 50%, and even the compound net profit growth rate of the entire “14th Five-Year Plan” (next 5 years) may reach 50%. Considering the possibility of continuous loss or even divestiture of the traditional shipbuilding business, we expect Yaguang Technology's net profit of 2020 to 2022 to be 3.4, 6.0, and 90 billion yuan respectively, EPS of 0.34, 0.60, and 0.89 yuan respectively, and corresponding PE is 44, 25, and 17 times. Comparing the valuation level of semiconductors 100 times and the valuation level of military carbon fiber listed companies 50 times next year, the military chip circuit where Yaguang Technology is located has a higher growth rate and more certainty, or is significantly underestimated. First coverage, giving a “buy” rating.
Risk warning: The scale of military orders falls short of expectations; shipbuilding business will still face losses.