Event: on October 27, 2020, the company disclosed that its operating income was 1.037 billion yuan, an increase of 8.39% over the same period last year, the net profit of 225 million yuan, an increase of 13.67%, and a net profit of 198 million yuan, up 5.95% over the same period last year.

The performance grew steadily in the first three quarters, and the proportion of military products may have increased. In the first three quarters of 2020, the company's operating income increased by 8.39% over the same period last year, of which the revenue in the third quarter was 342 million yuan, an increase of 14.67% over the same period last year, and the gross profit margin was 47.60%, an increase of 2.45% over the same period last year. We think this may be due to an increase in the proportion of military business with higher gross profit margin. The rate for the period was 25.23%, which increased significantly over the same period last year, with the largest increase in financial expenses, an increase of 275.09% over the same period last year, of which the amortization of convertible bond expenses during the reporting period was 18 million yuan. In the end, the company realized a 13.67% year-on-year increase in net profit, including 66 million yuan in the third quarter, an increase of 17.20% over the same period last year.

Starwave Communications has sufficient orders on hand and is expected to benefit from the modernization of national defense. Star Wave Communications specializes in the development of military RF / microwave devices, components, subsystems and their hybrid integrated circuit modules. in July 2020, Star Wave Communications signed two contracts with a total amount of 500 million yuan. Contract delivery will begin in December 2020 and is expected to have a significant positive impact on the performance industry in 2021. At the end of the third quarter, the company's inventory increased by 56.32% compared with the same period last year, with the increase in raw materials used by the main parent and subsidiary companies of Starwave Communications, which are mainly used to prepare orders on hand. With the enhancement of national defense information construction and military combat exercises, the demand for related microwave hybrid integrated circuit products is expected to increase, and star communication is expected to fully benefit.

The subdivision of electric power and rail is the leader, and the prosperity of the industry is high. The company is the leader in the electric power monitoring and testing industry, and the subsidiary Wolong in Yinchuan is the leader of the railway traction transformer. since 2020, the national network "key tasks" and "new infrastructure" have focused on the deployment of UHV, and the remaining routes are expected to be quickly approved for construction in 2020; "new infrastructure" investment areas such as inter-city high-speed railway and urban rail transit have become one of the main means to boost the domestic economy, and are expected to maintain long-term high investment. At present, the company's rapid promotion of new energy industry is also an important trend of industrial development in the future.

Strengthening the horizontal expansion and in-depth layout of the military electronics industry chain has become the company's long-term development strategy. The company's proposal to acquire 100% stake in Zhiliang Electronics by issuing shares and paying cash has been accepted by the Shenzhen Stock Exchange with a transaction consideration of 860 million yuan. Zhiliang Electronics withheld non-net profit of 40 million yuan in 2019, and this acquisition promised to achieve 0.48 / 0.57 / 69 million yuan in deduction non-net profit from 2020 to 2022, respectively. It focuses on the research, development and production of related products in the field of radar and electronic warfare. It has multiple product lines of military electronic countermeasures, electronic reconnaissance, electronic defense and radar simulation, which belong to the same industry chain as Starwave Communications. It is expected to create industrial coordination and strengthen the layout of the military electronics industry chain.

Profit forecast and investment suggestion: compared with the previous profit forecast of 3.50 / 4.92 / 590 million yuan net profit from 2020 to 2022, this time it is adjusted according to the performance of the third quarter, and it is considered that some products may be delivered in 2021. From 2020 to 2022, we predict that the company will achieve operating income of 16.20 pounds 22.43 / 2.754 billion yuan, an increase of 20.82% / 38.50% / 22.80% over the same period last year, and a net profit of 3.20 / 5.01 / 650 million yuan, an increase of 36.22% / 56.69% / 29.70% over the same period last year. The corresponding EPS is 0.89 / 1.40 / 1.81 yuan, and the PE is 29 / 19 / 14 times. Maintain a "buy" rating.

Risk hints: the risk that the investment in the future power and rail transit industry is lower than expected; the risk that the inventory at the end of the period cannot be carried forward in time due to the increase in stock production; and the risk that Zhiliang Electronics acquisition is not as expected.