3Q20 performance is in line with our expectations

Gao Xinxing announced 3Q20 results: 1-3Q20 operating income was 1.469 billion yuan, down 32.07% from the same period last year; net profit from home was-115 million yuan, down 290.16% from the same period last year. 3Q20's operating income was 530 million yuan, down 3.43% from the same period last year, and its net profit was-59 million yuan, up 52.87% from the same period last year. Affected by COVID-19 's epidemic situation and the company's strategic adjustment, the company's revenue side is still showing a downward trend. The company's performance is in line with our expectations. We keep the company's neutral rating unchanged, but we recommend that investors continue to pay attention to the company's development in the area of car networking / law enforcement standardization.

Trend of development

Affected by the increase in operating costs of individual large software systems and solution projects, Gao Xinxing 3Q20 gross profit margin fell 12.59ppt to 19.95% month-on-month. Due to the strategic adjustment period, the company actively reduced unnecessary R & D expenditure. 3Q20 R & D expenditure was 83 million yuan, 23.52% less than the same period last year, 248 million yuan less than the same period last year, and 19.28% lower than the same period last year. However, due to the increase in operating costs, the company's 3Q20 operating profit / net profit decreased compared with the previous month.

In the future, Gao Xinxing's strategy will continue to focus on the networking of vehicles and the standardization of law enforcement:

1) vehicle networking: the equipment is installed before and after the vehicle networking, and the company has realized the dual layout of domestic car factories and foreign operators. Front-loaded T-Box products have entered domestic vehicle factories such as Geely / Changan / BYD and T1 suppliers such as Visteon and cooperated with Qualcomm/ Chenxin Technology; rear-loaded ODB products have formed cooperation with AT&T/Verizon/T-Mobile/Vodafone and other foreign operators. The test team composed of 2020 Xingxing and Tencent / Neusoft / Wuling / Datang successfully passed the "new four-span" test, which verified the reliability and communication ability of the company's chip module / vehicle terminal in the actual scene. The company expects to jointly launch 5G online models with Geely in 2021. In addition, the company is also actively exploring the intelligent transportation layout of C-V2X equipment + solution platform + application. 2020x4 signed a contract with self-driving startup Wenyuan Zhixing to jointly promote the collaborative landing of self-driving and vehicle networking. 2020x5 signed a contract with Baidu, Inc. to join Apollo Ecology. 2020B7 has signed a contract with Tencent Cloud to cooperate in areas such as intelligent transportation / smart city. 2) in the aspect of law enforcement standardization, the company continues to upgrade its core products. Taking the law enforcement case management center as an example, the company has launched a comprehensive solution of one platform and three centers. 2020X5 released the domestic eight-core intelligent law enforcement recorder E5 and the light and small law enforcement recorder E1, which will be coordinated with its video and audio management platform.

2020x10 Gao Xinxing released a plan to issue shares to specific targets. The company intends to issue shares of no more than 30% of the total share capital before the issue (not more than 521 million shares) and raise no more than 1.828 billion yuan for intelligent manufacturing base, intelligent rail transit industrial base and other projects. We believe that the company's fund-raising projects are expected to enhance the company's production and R & D capabilities and supply chain management efficiency (currently the company is mainly outsourcing processing) and rail transit related products and technology research and development.

Profit forecast and valuation

We keep the company's 2020E/2021E profit forecast unchanged. The current share price of the company corresponds to the 2020E/2021E 3.2x/3.0x price-to-sales ratio. We keep the neutral rating and the target price of RMB 5.40 unchanged, corresponding to the 2020E/2021E 3.7x/3.5x price-to-sales ratio, which has 15.9% upside compared to the current share price.

Risk.

Goodwill impairment risk; the number of front / rear loads is lower than expected; intelligent transportation construction is not as expected; law enforcement standardization construction is not as expected.