I. Incident Overview
On October 15, the company released its report for the third quarter of 2020, achieving operating income of 1,349 million yuan, an increase of 14.18% over the previous year; achieving net profit of 50.72 million yuan, a year-on-year decrease of 60.78%.
II. Analysis and Judgment
Q3 performance declined markedly. Equity incentive amortization affected annual performance in the first three quarters of 2020. The company achieved operating income of 1,349 billion yuan, an increase of 14.18% over the previous year; achieved net profit of 50.72 million yuan, a decrease of 60.78% over the previous year; excluding the impact of equity incentive fees, it achieved net profit of 132 million yuan, an increase of 2.42% over the previous year. Looking at a single quarter, Q3 achieved operating income of 439 million yuan, a year-on-year decrease of 18.14%; Guimu's net profit was 1,47,000 yuan, a year-on-year decrease of 97.27%; excluding amortization of equity incentive costs, Q3 performance declined by 21.44%. During the reporting period, the company's expenses rate during the reporting period was 23.69%, an increase of 8.08pct over the same period last year. The main reason was that amortization of equity incentive fee costs was included in management expenses, which led to a 133.61% year-on-year increase in management expenses. In addition, R&D expenses were 33.61 million yuan, an increase of 54.15% over the previous year. In terms of profit margin, gross margin was 29.69%, up 1.97 pct year on year; ROE was 1.01%, down 1.69 pct year on year. The company's inventory was 1,101 billion yuan, an increase of 31.56% over the previous year. The main reason was the increase in products and raw material spare parts due to increased orders.
Demand for missiles+satellites is increasing, and military electronics is expected to continue to grow at a high rate. The military electronics business has become the company's core sector, including microwave circuits and components and semiconductor devices, such as microwave diodes and crystal transistors, microwave microchips, hybrid integrated circuits, etc. During the reporting period, the sector achieved revenue of 1,009 million yuan, an increase of 18.29% over the previous year; excluding amortization of equity incentive costs, net profit was 185 million yuan, an increase of 15.49% over the previous year. On October 12, the company announced the signing of the “Product Preparation Agreement”. The total amount reached 302 million yuan. The general preparation agreement was 20% of the total future orders, indicating that the company's subsequent orders were sufficient. During the “14th Five-Year Plan” period, the number of missile purchases is expected to increase significantly, the construction progress of low-orbit satellites will accelerate, demand for microwave components is expected to increase dramatically, and the company's military electronics business will continue to grow at a high rate.
Shipbuilding has been greatly affected by the epidemic. It is expected to achieve restorative growth in the future. During the reporting period, the company's shipbuilding sector achieved revenue of 339 million yuan, an increase of 3.47% over the previous year. Excluding amortization of equity incentive costs, the sector still lost 25.11 million yuan. During the reporting period, the company successively sold projects such as the Shanghai Passenger Shipping Company's 410-seat catamaran aluminum alloy high-speed passenger ship and the Hunan Water Transport Construction Investment Group's Xiangjiang Waterway Construction Investment Group's batch work boat. As the impact of the pandemic is eliminated, we expect the company's naval sector to experience restorative growth in the future.
Implement equity incentives and be optimistic about the company's long-term development
On January 15, 2020, the company announced the 2020 Stock Options and Restricted Stock Incentive Plan. It plans to grant a total of 5.195 million shares of rights to 133 senior managers, core technical (business) personnel, etc., including 48.95 million stock options and 3 million restricted stocks. The option exercise price is 7.84 yuan, and the restricted stock price is 3.92 yuan/share. The company's interests are tied to the interests of core employees, which is conducive to the long-term development of the company.
III. Investment Suggestions
The company has achieved a breakthrough in the military electronics field, and the original boat sector is expected to resume growth in the future. We are optimistic about the company's long-term development.
The company's EPS from 2020 to 2022 is expected to be 0.30, 0.45, and 0.66 yuan respectively. The corresponding PE is 50X, 34X, and 23X. Comparable with the company's average valuation of 65X, maintaining the “recommended” rating.
IV. Risk Reminder
Shipbuilding capacity removal is progressing slowly; product development progress falls short of expectations; military orders are at risk of volatility