Incidents:

On August 24, 2023, the company released its 2023 semi-annual report. In the first half of 2023, the company achieved revenue of 1,917 million yuan, an increase of 0.58% over the previous year; achieved net profit of 86 million yuan, a year-on-year decrease of 7.57%. Performance was slightly under pressure; net profit of non-attributable net profit was 46 million yuan, a year-on-year decrease of 30.31%.

The air traffic control and radio frequency business are growing steadily, actively expanding the smart terminal business market. The company's air traffic control business and microwave radio frequency business participate in the construction of the domestic military goods market. It is the largest military and civilian air traffic control system and equipment research and production base in China. In the first half of '23, air traffic control products achieved revenue of 555 million yuan, an increase of 10.67% over the previous year, accounting for 28.94% of revenue. Microwave RF products achieved revenue of 121 million yuan, an increase of 24.68% over the previous year, accounting for 6.33% of revenue. The company focuses on digital audio and video terminals, data communication terminals and industry application services, leverages its existing advantages, and continues to increase its market development efforts. In the first half of '23, smart terminal products achieved revenue of 1.156 billion yuan, an increase of 14.66% over the previous year, accounting for 60.32% of revenue.

Increase investment in R&D and accelerate technological innovation

In the field of smart terminal business, the company has gradually developed product development and market layout in communication technology fields such as 5G communication technology, 10G PON, and WiFi6, establishing a strong competitive advantage in the industry; in the air traffic control business field, it is the earliest domestic unit engaged in the development and production of air traffic control systems and related avionics. It is a first-level supplier of C919 large passenger aircraft. Related products have been widely used in the airborne and terrestrial fields of civil aviation; in the field of microwave radio frequency, it has mastered key technology research and implementation including millimeter-wave front-end multi-function chip design and development, and ultra-wideband spectrum detection signal processing and many other key core technologies. R&D expenses in the first half of '23 were 193 million yuan, an increase of 9.92% over the previous year.

Profit Forecasts, Valuations, and Ratings

Considering that the company is a core supplier of air traffic control equipment for military and civilian use, and the increase in subsequent orders for C919 aircraft, we expect the company's revenue in 2023-25 to be 43.07/48.24/5.477 billion yuan, corresponding growth rates of 10.88%/11.99%/13.55%, net profit of 244/317/396 million yuan, corresponding growth rates of 23.32%/30.07%/24.78%, respectively. The three-year CAGR is 26.02% and EPS is 0.24 billion yuan, respectively /0.31/0.39 yuan/share, corresponding PE is 27/21/16 times, respectively. Since the company's military products business has benefited from the development of defense equipment in the “14th Five-Year Plan”, civilian microwave components can be used in wireless communication, automotive millimeter wave radar, etc., and prosperity is expected to increase. According to the relative valuation method, with reference to comparable company valuations, we gave the company 26 times PE in 2024, and the company's corresponding target price is 8.10 yuan. Maintain a “buy” rating.

Risk warning: Market competition in the smart terminal sector is intensifying, and military orders are at risk of fluctuating.