3Q20 performance is lower than expected.

The company announced its results for the first three quarters of 2020: revenue of 1.058 billion yuan, YoY-30.19%, and net profit of-75 million yuan, compared with-72 million yuan in the same period last year. In the third quarter, the company achieved revenue of 354 million yuan, YoY-31.43%, and net profit of-51 million yuan, compared with-25 million yuan in the same period last year. The performance was lower than our expectations, mainly because the company reduced the scale of uncompetitive non-autonomous products, resulting in a large decline in the revenue scale of radar plate and security plate, and the high expense rate during the period led to a loss in the first three quarters of the company.

The gross profit margin rose, but the higher expense rate during the period resulted in a negative return net profit. 1) in the first three quarters, the company's gross profit margin was 21.20%, an increase in 5.13ppt compared with the same period last year. 2) the expense rate during the period is 29.66%, an increase of 7.83ppt compared with the same period last year, which has an impact on the profits of the current period; 3) the management fee is 180 million yuan, accounting for 16.98% of revenue, an increase of 6.01ppt over the same period last year, indicating that the company's cost control ability needs to be strengthened. 4) the financial cost was 47 million yuan, an increase of 43.90% over the same period last year, mainly due to the increase in interest charges caused by the company's new factoring financing for Ping an City Project, and the decrease in long-term recoverable funds from the security sector compared with the same period last year.

The increase in unrecognized income products leads to an increase in inventory. 1) the company's inventory at the end of the third quarter was 1.865 billion yuan, an increase of 53.94% over the beginning of the year, mainly due to the commissioning of the radar plate project and the increase in the construction of the safety plate project, resulting in an increase in inventory compared with the beginning of the period. 2) at the end of the third quarter, the prepaid account was 242 million yuan, an increase of 505.55% over the beginning of the year, mainly due to the supplier payment of the cooking class project in the field of motor vehicle protection.

The decrease in rebate year-on-year led to an increase in cash outflow from operating activities compared with the same period last year. The net cash flow of the company's operating activities in the first three quarters was-762 million yuan, an increase of 191 million yuan over the same period last year, mainly due to the decrease in rebates from the company's headquarters radar plate and Bowei Changan perceived low-altitude projects.

Trend of development

The company is a leading enterprise in China's meteorological / air traffic control radar industry. In the field of radar industry, the company's main products include weather radar, air traffic control radar, low-altitude warning radar and microwave components and other radar-related products, complete bands and high market share. The company continues to increase R & D investment and constantly improve the scientific research management and intellectual property management system. By the end of 2019, the cumulative number of valid patents reached 581, of which 117 invention patents accounted for a significant increase. The company was successfully awarded the fourth batch of intellectual property advantage enterprises in Anhui Province. We believe that the company, as the only listing platform of China Electric Power Bo Weiwei, does not rule out the possibility of integrating relevant high-quality assets by drawing lessons from the national monitoring technology model of China Electric Power Group in the future.

Profit forecast and valuation

According to the characteristics of the industry and historical data, the company's performance is mainly concentrated in the fourth quarter release.

Therefore, we keep the profit forecast for 2020 and 2021 unchanged, with operating income of 4.221 billion yuan and 4.805 billion yuan in 2020 and 2021 respectively, and net profit of 140 million yuan and 190 million yuan respectively. The current share price corresponds to 2020 43.6x/32.2x E in 2021. We maintain our outperforming industry rating and target price of 54.00 yuan, corresponding to 45.4xP/E in 2021, with a potential increase of 40.9%.

Risk.

Market systemic risk; radar orders are lower than expected.