Investment suggestion

FiberHome announced 3Q20 results: 1-3Q20 operating income was 15.824 billion yuan, down 10.97% from the same period last year, and net profit was 277 million yuan, down 55.22% from the same period last year. 3Q20's operating income was 6.385 billion yuan, up 10.29% over the same period last year, and its net profit was 222 million yuan, an increase of 15.61% over the same period last year. The performance is in line with our expectations. We believe that the overall operation of the company has resumed, the new price of optical fiber has been implemented in 3Q20, and the negative factors have been exhausted.

We expect that with the recovery of the epidemic at home and abroad, network traffic will be further upgraded, the company will achieve a significant recovery of business next year, and the performance will maintain good growth. At the same time, the company will maintain its competitiveness in the optical communication equipment market, with the continuous investment of capital expenditure, the chip capacity will be further consolidated. Keep the target price unchanged and upgrade the company's rating to outperform the industry:

The business resumed, and the profit growth rate of the single quarter became positive. The company declined in the first half of the year due to the impact of the epidemic and trade frictions. The company's business recovered significantly in the third quarter. Revenue rebounded from the same period last year. However, due to the decline of optical fiber due to the impact of mobile collection in the third quarter, the lower quotation of 5G carrier network equipment, and the decline in the proportion of overseas business, gross profit margin fell 3.36ppt year-on-year, but increased 2.60ppt month-on-month. The increase in the scale of the company's four fees indicates that the company's sales, research and development and other activities are gradually on the right path.

Expand 2B market on the basis of 5G. 5G construction itself belongs to the bidding mode, at the same time, the construction progress is affected by the policy, and the cable network construction remained stable during the year. The company strives to increase its market share at home and abroad, and at the same time make efforts to the government and enterprise market. The company's subsidiary FiberHome Star maintains a good position in the information security market, and the 2H20 information security market recovers better than in the first half of the year. We believe that with the promotion of 5G construction, the demand for network security will continue to increase, and may show a better development trend in 2021. At the same time, FiberHome has broken through the power generation market and funded the establishment of Marine Engineering equipment Co., Ltd.; at the same time, it has obtained a number of rail transit communication system projects such as Hefei and Zhengzhou; in addition, the company is also launching various solutions for data centers, showing a trend of diversification.

Relying on the core technology, the development is relatively stable. FiberHome is the core optical communication equipment and optical fiber cable manufacturer in China. At the same time, the ability of data network products has been formed in recent years. The company also lays out the core chip through its subsidiaries, and the core technology will help the company achieve a more stable development.

The biggest difference between us and the market is that we think the negative factors such as optical fiber and cable have been exhausted.

Potential catalyst: cyber security / 5G winning the bid exceeded expectations.

Profit forecast and valuation

We keep our 2020E/2021E profit forecast unchanged. The company's current share price corresponds to 2020E/2021E price-to-earnings ratio 38.1x/33.1x. We keep the company's target price unchanged at 28.83 yuan, and upgrade the company's rating to outperform the industry, taking into account the resumption of business growth. The target price corresponds to the company's 2020E/2021E price-to-earnings ratio 46.5x/40.4x, which is 22.11% higher than the current share price.

Risk.

The impact of the list of entities has intensified. There are uncertainties in network security and 5G bidding rhythm.