Incident: The company released its 2023 annual report on August 27. 1H23 achieved revenue of 491 million yuan, YoY +10.9%; net profit of 195 million yuan, YoY +0.7% (net profit of 218 million yuan, YoY +12.3% after deducting the impact of amortization of equity incentives); net profit of 173 million yuan, YoY -1.2% after deducting the impact of amortization of equity incentives. The performance was in line with market expectations. The company's production capacity has expanded, and the scale of product delivery and acceptance has gradually increased.

2Q23 Net profit increased by 22%; profitability continued to increase. 1) Looking at a single quarter: 2Q23 achieved revenue of 246 million yuan, YoY +12.9%; net profit of 105 million yuan, YoY +21.7%; after deducting non-net profit of 94 million yuan, YoY +23.2%. 2) Profitability: 2Q23 gross margin increased 4.4ppt to 54.1% year on year; net margin increased 3.1 ppt to 43.0% year on year. 1H23 gross margin increased 4.8ppt to 53.7% year on year; net margin fell 4.1ppt to 39.7% year on year. The company continues to focus on accurate guidance business, increasing gross margin; at the same time, cost control has been strengthened, and net interest rate has increased.

Continuously focus on the core business of precision guidance; production capacity is steadily expanding. By product, 1H23, a precision guidance product, achieved revenue of 491 million yuan, YoY +10.9%, and gross margin increased 4.84ppt to 53.67% year-on-year.

As of the end of 2Q23, the construction progress of the technical improvement and capacity expansion project for the production base was 55.90%, and it is expected to reach the scheduled state of use by December 31, 2023. In October 2022, the company granted a total of 3 million Class II restricted shares to 101 eligible incentive recipients at a price of 34.56 yuan/share. Through the implementation of incentives, the company further established and improved a long-term incentive mechanism, attracted and retained outstanding talents, fully mobilized employee enthusiasm, and effectively combined shareholders' interests, company interests and the personal interests of the core team. In 1H23, equity incentive expenses were amortized totaling 26.4859 million yuan.

Credit impairment losses and asset impairment losses increased; contract liabilities increased by 40%. The cost rate for the 1H23 period increased by 5.0 ppt to 11.3% year on year: 1) The sales expense rate increased by 1.1 ppt to 1.3% year on year; 2) The management expense rate increased by 2.2 ppt to 6.4%; 3) The financial expense rate was -0.9%, 1H22 was -2.3%; 4) the R&D expense rate increased 0.2 ppt to 4.4% year on year; and R&D expenses increased 16.7% year on year to 102 million yuan. As of the end of 2Q23, the company: 1) accounts receivable and notes amounted to $413 million, a decrease of 50.4% from the end of 1Q23; 2) advance payments of $0.08 billion, up 5.6% from the end of 1Q23; 3) inventory of $1,885 million, up 18.1% from the end of 1Q23; 4) contract liabilities of $536 million, up 39.7% from the end of 1Q23. 1H23:1) Net cash flow from operating activities was 486 million yuan, and 1H22 was 615 million yuan; 2) impairment losses on notes receivable and account credit increased by 23.1501 million yuan year on year; inventory impairment reserves increased by 2.2069 million yuan year on year.

Investment suggestions: The company specializes in customized millimeter-wave microsystems, focusing on the precise guidance business sector. The core products have been rapidly launched since finalization in 2019. In February 2022, the company signed a major contract of 2.4 billion yuan to support subsequent performance growth. In October 2022, the company implemented equity incentives, demonstrating firm confidence in long-term development.

We expect the company's net profit to be 425 million yuan, 582 million yuan, and 759 million yuan respectively from 2023 to 2025. The current stock price corresponds to PE from 2023 to 2025, respectively 22x/16x/12x. We maintain the “recommended” rating, taking into account the company's technical advantages and the future development space of the industry.

Risk warning: Market demand falls short of expectations, new product development falls short of expectations, etc.