Events:

The company released its semi-annual report for 2020, with operating income of 1.518 billion yuan, down 15.21% from the same period last year, and net profit of 86.41 million yuan, down 44.11% from the same period last year.

Main points of investment:

The electronic sector continues to grow; chemical business production is at full capacity, and active measures are taken to deal with the impact of the epidemic. The revenue and net profit of 20H1's electronic sector were 268 million yuan, up 0.17% from the same period last year, and the net profit was 50 million yuan, down 8.16% from the same period last year, accounting for 17.67% and 57.55% of the company's total income and net profit, respectively. Among them, Changsha Shaoguang income, mainly military products, was 128 million yuan, an increase of 20.71% over the same period last year. At the level of consolidated statements, it contributed 43.34 million yuan to the company's profits, an increase of 17.64% over the same period last year. The income from the chemical business was 1.249 billion yuan, down 17.92% from the same period last year, due to the decline in the average sales price of the main products affected by the external environment, epidemic situation and other factors; from the production side, the production of the company is stable, the main equipment is operating at full capacity, and the production and marketing rate of caustic soda, the largest product, is 102.83%. In order to deal with the impact of the epidemic, the company enhanced customer stickiness by improving the level of service, and actively developed new customers, with 92 new customers during the period, including 55 direct channel customers; in addition, the company took a series of measures to reduce costs and increase efficiency.

The layout of the ecological chain of "chip + communication" has been formed, with equal emphasis on the military and the people, and the development prospect is bright. With Weike Electronics as the main body, 20H1 controls Hong Linwei with a 45% stake and becomes its largest shareholder in the communications industry. With Changsha Shaoguang as the main body, it acquires 43.66% of the shares in Wuhan Navigation Institute and becomes its largest shareholder. The layout of Beidou 3 related industries is expected to fully benefit from the market dividend of Beidou 3 system. At present, the company's electronic business has formed a layout with Changsha Shaoguang and Weike Electronics as the main body, chip products as the core, around the two major sectors of high-end chips and communications, covering high-end chips, Beidou and communication RF industries. Changsha Shaoguang actively participated in important military projects, 20H1 undertook the research and development tasks of more than a dozen varieties, and many of the projects undertaken last year have passed user verification and are expected to enter the stage of mass production; Weike Electronics has deeply participated in the research and development of domestic alternative products in a military institute and achieved good results. On the basis of military electronics, the company expanded smoothly to dual-use electronics. During the period, the revenue from electronic and civilian products reached 86 million yuan, an increase of 76.73% over the same period last year. Honglin Weiwei's order is stable and is applying for Huawei's first-tier supplier.

Profit forecast and investment rating: maintain the overweight rating. On the basis of the successful transformation of military electronics, the company continues to increase the layout of communications and Beidou No. 3 and other related business, the electronic plate attaches equal importance to the military and the people, and the development prospect is bright; the recent extension of the chairman's holdings plan shows confidence in development. It is estimated that the net profit from 2020 to 2021 is 439 million yuan, 526 million yuan and 633 million yuan respectively, the corresponding EPS is 0.64,0.76 yuan and 0.92 yuan respectively, and the corresponding share price PE is 39 times, 33 times and 27 times respectively.

Risk tips: 1) the progress of product research and development is not as expected; 2) the progress of business related to Beidou 3 is lower than expected; 3) the risk of decline in chemical business.