1H20 performance is lower than we expected.

The company announced 1H20 results: revenue was 457 million yuan, down 2.61% from the same period last year; net profit from home was 58 million yuan, down 15.38% from the same period last year, corresponding to earnings per share of 0.05 yuan, down 16.67% from the same period last year, which was lower than our expectations, mainly due to interest amortization expenses incurred by 1H20 issuing convertible bonds and an increase in R & D investment. 1H20 R & D expenses totaled 38.81 million yuan, an increase of 60.37% over the same period last year. The increase in expenses during the period had a certain impact on the current profits.

Radar business performance is eye-catching, other businesses have declined to varying degrees. 1H20's radar business revenue was 146 million yuan, an increase of 55.33% over the same period last year, mainly because special radar models entered the stage of mass production. The company also achieves breakthroughs in technology and market promotion in radar signal processing modules, slope radar, millimeter wave radar antennas and other products. In addition, satellite applications, secure storage and other businesses have declined by 5.5% to 32.4% to varying degrees, and we believe that the main factor may be the impact of product delivery cycle.

The gross profit margin decreased slightly and the cost increased slightly during the period. Affected by the structural changes caused by different product delivery times, the gross profit margin of each sub-business of 1H20 company fluctuated to a certain extent, resulting in an overall gross profit margin of about 47.3%, a slight decline in 1.3ppt compared with the same period last year. The company's expenses during the 1H20 period totaled 138 million yuan, with an expense rate of 30.2%, an increase of 2.5ppt over the same period last year. 1H20's net profit margin is 12.8%, the lowest in nearly three years.

Net operating cash flow is negative and usually becomes a regular employee at the end of the year. The net cash outflow from 1H20's operating activities was 139 million yuan, a decrease in the rate of outflow compared with the same period last year. Historically, the company has seen net outflows in all quarters and positive inflows for the whole year at the end of the year. This is related to the characteristics of centralized delivery and settlement of the industry at the end of the year.

Trend of development

Pay attention to the development opportunities of radar system business under the strong demand for information equipment. The company has traditional advantages in radar technology, and currently has products in special radar models, general radar signal processing modules, slope radar, 5G millimeter wave transmission antennas and so on. We expect that with the acceleration of information construction in specific areas of the country, the company's special radar models and other products are expected to achieve rapid growth.

The satellite application business cooperates deeply with the Arms Industry Group, and the navigation field is expected to develop rapidly. The company and the Arms Industry Group jointly established Northern Reko (Anhui) Company, which has achieved mass production of several models in the field of special applications, and made a breakthrough in the core basic components of Beidou No. 3. We believe that Beidou navigation application may be a more competitive business sector in the future.

In addition, the company has undertaken the task of development and production in the field of satellite and satellite remote sensing.

Profit forecast and valuation

We maintain that the net profit of Raike Defense 2020Universe 21E is 164 yuan and 200 million yuan respectively, and the current share price corresponds to 64.5 times / 52.9 times 2020amp 2021 earnings ratio, the valuation position is reasonably on the high side.

We maintain our "neutral" rating and target price of 7.12 yuan, corresponding to 47 times / 37 times 2020 prime 21-year price-to-earnings ratio, which is 27% lower than the current share price.

Risk.

The development of radar business is not as expected, orders and delivery are not as expected, and the progress of commercialization of satellite application business is lower than expected.