Report guide
The company's revenue for the first three quarters was 1.04 billion yuan, YOY +8.4%; Guimu's net profit was 230 million yuan, YOY +14%; of these, the third quarter achieved net profit of 0.7 billion yuan and YOY +17%, which is basically in line with market expectations.
Key points of investment
The electricity and military business is expected to be delivered centrally in the fourth quarter. Sufficient orders and a 56% year-on-year increase in inventory were affected by the epidemic. Delivery of power equipment condition testing, monitoring products, and military electronics business was delayed until the fourth quarter. The company's inventory for the first three quarters was 380 million yuan, a sharp increase of 140 million yuan over the same period last year. This was due to the power business and subsidiary Starwave Communications based on sufficient orders in hand to prepare goods.
The cash flow situation improved dramatically, reaching a new high since listing. The balance to debt ratio fell slightly. The net cash flow from operating activities in the first three quarters was 130 million yuan, a record high since listing. This was due to a sharp decline in guarantees and notes payable security deposits paid by Yinchuan Wolong during the reporting period. Q3 Listed companies repaid 130 million yuan of short-term loans. The balance ratio at the end of the third quarter was 52%, a slight decrease of 2.5pct over the previous quarter.
Military industry prosperity was high during the “14th Five-Year Plan” period, and the company's military electronics business is expected to explode 1) Benefiting from increased downstream arms procurement, orders related to the subsidiary Starwave Communications (which specializes in microwave hybrid integrated circuits) exceeded expectations. If product delivery goes smoothly or has a positive impact on annual performance; 2) Zhiliang Electronics, the target of the proposed acquisition, is a leading private enterprise in the field of electronic warfare (specializing in electronic reconnaissance, electromagnetic protection, radar anti-interference and simulation training), which is highly scarce. Zhiliang Electronics promises that net profit after deduction for 2020-2022 will not be less than 4780, 5736, 68.83 million yuan. Considering that the company has sufficient orders in hand and strong ability to sign new orders, we believe that the company will probably exceed its performance promises. The asset purchase was accepted by the Shenzhen Stock Exchange on October 14 and is progressing steadily.
Profit forecasting and valuation
Optimistic about the development prospects of the military electronics business during the “14th Five-Year Plan” period, it is estimated that military electronics revenue will account for 44% in 2021 after the integration is completed. The company's net profit is estimated to be 31/54/650 million yuan in 2020-2022, with year-on-year growth rates of 32%/75%/19% respectively, and corresponding PE of 35/20/17 times, respectively. Maintain a “buy” rating.
Risk warning
The scale of investment in railways or power grids fell short of expectations; the merger and acquisition of Zhiliang Electronics failed; the delivery progress of military orders fell short of expectations; the risk of major shareholders' equity pledge; and the risk of restricted shares being lifted.