Core views:

Incident & Comment: Revenue and profit are under pressure in the short term, and improvements are expected in the future when there are plenty of orders in hand. On April 24, the company released its 2022 annual report, achieving operating income of 541 million yuan, an increase of 20.35% over the previous year; achieving net profit of 75 million yuan, a decrease of 32.40% over the previous year; and achieving net profit of 71 million yuan after deducting non-return mother's net profit of 71 million yuan, a decrease of 30.13% over the previous year. The company released its report for the first quarter of 2023. During the reporting period, the company achieved operating income of 68 million yuan, a decrease of 32.18% over the previous year; the net profit returned to the mother was 0.1 million yuan, a decrease of 114.83% over the previous year.

Core investment logic: (1) On the revenue side, the continuous release of military aircraft main fighter models and the increase in the value of avionics systems drive steady growth in airborne business, increased precision guidance applications and the release of major missile models. The ballistic business is expected to become a new growth point for the company's performance. The vehicle and shipborne sectors are expected to benefit from the informatization construction of weapon platforms, compounded by the “small core and big collaboration” outsourcing trend to benefit private enterprises, and the company's long-term growth is improving. (2) On the pattern side, the pattern of special embedded computers is scattered, dominated by military engineering institutes, and complemented by private enterprises. Core private enterprise competitors are limited, and the degree of homogenization of technology and products among manufacturers within the same market segment is relatively low. The company has strong competitiveness with the advantages of a complete product lineage and diverse supporting directions. (3) On the production capacity side, the construction of fund-raising projects is progressing steadily. Embedded computer capacity expansion projects have effectively increased production capacity and rapid responsiveness. The expansion of R&D production sites and the introduction of advanced R&D experimental equipment have further enhanced R&D capabilities, consolidated technological advantages, and enhanced the company's competitiveness.

Profit forecast and investment advice: EPS for 23-25 was 2.36, 3.23, and 4.15 yuan/share, respectively.

Taking into account that the company is deeply involved in the embedded computer field, benefiting from the construction of equipment information technology, the rapid growth of the special embedded computer market, the company is expected to usher in broad development space. Referring to comparable company valuations, the company was given a PE valuation of 45 times over 23 years, corresponding to a reasonable value of 106.15 yuan/share, and a “increase in holdings” rating.

Risk warning: Orders fall short of expected risks, product price reductions lead to a decline in gross margin, and insufficient procurement of raw materials affects the risk of product delivery.