Incident: The company released its 2023 annual report on August 25, 2023. 1H23 achieved revenue of 150 million yuan, YoY +23.3%; realized net profit of 5.7 million yuan, and 1.11 million yuan for the same period last year. The company's 1H23 revenue increase was mainly due to vigorous development of domestic and foreign markets, and increased revenue from overseas, security and other fields; the decline in net profit from Gimu was mainly due to the company's continuous increase in R&D investment, talent team building, and market expansion. Expenses increased by varying degrees during the period. The comprehensive review is as follows:
Factors such as an increase in integrated projects and an increase in the value of external procurement equipment affect the level of gross margin. Looking at a single quarter, the company: 1) 2Q23 achieved revenue of 66 million yuan, a year-on-year decrease of 6.7%; net profit for the same period last year was 107 million yuan. There was a decline in performance in the second quarter. 2) 2Q23 gross margin was 34.2%, a year-on-year decrease of 10.35ppt; net margin was -10.9%, compared to 1.1% in the same period last year. The comprehensive gross margin for the first half of 2023 was 41.7%, a year-on-year decrease of 6.15 ppt; net profit margin was -4.1%, compared to -1.4% for the same period last year. The decline in gross margin is mainly due to the diversification of demand from downstream customers, the company's integration projects have further increased, the value of external procurement equipment has increased, and the year-on-year increase in operating costs has been higher than the increase in operating income.
R&D investment has increased, and breakthroughs have been made in heavy-duty drones, unattended systems, and multi-rotor drones.
The company's expense rate for the first half of 2023 was 53.3%, a year-on-year decrease of 1.51 ppt. Among them: 1) The sales expenses rate was 27.6%, up 1.41ppt year on year, mainly due to maintenance and material consumption, depreciation and amortization expenses, service expenses, and travel expenses to varying degrees; 2) the management expenses rate was 12.2%, a year-on-year decrease of 1.97 ppt; 3) R&D expenses were 13.0%, up 1.17 ppt year on year; R&D expenses were 0.2 billion yuan, up 35.6% year on year, mainly due to an increase in employee compensation and R&D materials. During the reporting period, the company made breakthroughs in product development such as heavy-duty drones, unattended systems, and multi-rotor drones. By the end of 2Q23, the company: 1) accounts receivable and notes were $120 million, which was basically the same as at the beginning of the year; 2) inventory of $150 million, up 15.1% from the beginning of the year; 3) contract liabilities of $0.3 billion, up 29.2% from the beginning of the year, mainly due to an increase in advance payments; 4) net cash flow from operating activities was -60 million yuan, and -70 million yuan for the same period last year, mainly due to an increase in repayments for the current period.
Total orders for the first half of 2023 increased 48% year on year; the Dapeng drone manufacturing base project was completed and implemented.
In terms of orders, from January to June 2023, the company achieved a year-on-year increase of about 48% in total orders. The domestic market in China was basically the same as in the same period last year; orders in the defense market grew steadily, and major breakthroughs were made in new product development; overseas markets were booming, and business orders increased sharply year-on-year; and the police drone market also achieved a certain breakthrough. In terms of fund-raising projects, the company's “Dapeng Drone Manufacturing Base Project” completed all construction in April 2023. The total production capacity is equivalent to about 3,700 CW-007 drones per year, and the production capacity has been greatly expanded.
Investment suggestions: The company is a leader in full-spectrum industrial-grade drone systems in China. It has a rich product matrix and a wide range of downstream applications. Benefiting from domestic and foreign industrial demand, as well as accelerated market demand in the military trade and domestic special fields, the company's future performance may be expected to continue to rise. According to the pace of downstream demand and changes in the pace of delivery, we adjusted the company's net profit from 2023 to 2025 to 49 million yuan, 113 million yuan, and 192 million yuan. The current stock price corresponding to PE from 2023 to 2025 is 66x/28x/17x. Maintain the “Recommended” rating.
Risk warning: Order delivery falls short of expectations; increased competition has led to changes in profit margins, etc.