Focus of opinion

Investment suggestion

Zhenxin Technology announced its 2022 semi-annual report results: the company achieved operating income of 500 million yuan, an increase of 39% over the same period last year; a net profit of 163 million yuan, an increase of 105% over the same period last year; and a non-return net profit of 144 million yuan, an increase of 113.67% over the same period last year, in line with our expectations. We saw an improvement in the company's profitability, with 1H22 achieving a gross profit margin of 64.0%, year-on-year + 4.77ppt; year-on-year expense rate improved, 1H22 sales / management / R & D expense rate was 5.3% 1.23ppt/0.76ppt/5.18ppt 12.2% 1.23ppt/0.76ppt/5.18ppt 7.7%, year-on-year decline in net profit margin reached 32.5%, year-on-year increase in 10.50ppt. In view of the improvement in the company's profitability and the adjustment of the stock price to a reasonable range, upgrade the rating to outperform the industry.

The reasons are as follows:

Integrated circuits maintain high growth, driving revenue to continue to grow at a high speed. Benefiting from domestic substitution, Internet of things, automobile intelligence / networking trend and other factors, China's integrated circuit market demand continues to be strong. According to the China Semiconductor Industry Association, China's integrated circuit industry reached 1.04583 trillion yuan in 2021, an increase of 18.20% over the same period last year. 1H22 focuses on the research and development of key technologies such as converters, frequency ensemble and vehicle gauge transceiver components. With leading product technology / extensive industry channels, 1H22's integrated circuit business achieved revenue of 262 million yuan, an increase of 77.45% over the same period last year, revenue accounted for 52.44%, and gross profit margin reached 74.38%. We believe that the increase in the gross profit margin of the integrated circuit business (year-on-year increase in 9.37ppt) / business share (year-on-year increase in 11.41ppt) has led to a continued upward trend in the overall gross margin.

Beidou business is affected by delivery and acceptance, Sichuan Smart City has achieved large-scale deployment. 1) as a domestic leader in the field of Beidou satellite navigation, the company is committed to enriching Beidou 3 baseband chip product line, improving module anti-interference and developing various types of user terminals; however, affected by the progress of product delivery and acceptance, 1H22 Beidou terminal business achieved 141 million yuan in revenue, a decrease of 2.57% compared with the same period last year. 2) for the smart city business, the company independently mastered the core technologies and algorithms such as UAV visual positioning, wide dynamic video capture, de-fog / cloud / haze removal algorithm processing, and video real-time seamless splicing, focusing on expanding Skynet transformation and perceptual source construction projects in Sichuan's local advantageous areas. Orders achieved a breakthrough growth. 1H22 achieved revenue of 96 million yuan, an increase of 46.02% over the same period last year, and a gross profit margin of 43.57%.

What is the biggest difference between us and the market? We believe that the company's integrated circuits in communications, industrial control, automotive and other downstream areas of rapid penetration, the development is faster than expected.

Potential catalysts: integrated circuits to improve profitability; Beidou business to further expand.

Profit forecast and valuation

As a result of improved profitability due to higher gross profit margins and lower expense rates, we raised net profit by 8% to 246 million yuan in 2022, introducing a profit forecast of 317 million yuan in 2023 for the first time. The current share price corresponds to a price-to-earnings ratio of 55.4 / 43.0 in 2023. As the share price has entered a reasonable range after adjustment, the rating has been upgraded to outperform the industry, but considering the downward shift of the valuation center of the industry, the target price has been maintained at 28.0 yuan, corresponding to 49.4 times earnings in 2023, which has 15% upward space compared with the current stock price.

Risk.

The promotion of Beidou is not as expected; the construction of smart city is not as expected; the demand for integrated circuits is not as expected.