A leading enterprise in power line carrier communication, based on the grid market, laying out non-grid applications. The company is a leading manufacturer of power line carrier communication (PLC) chips in China, and has been deeply involved in PLC technology for more than 20 years. The company's overall growth was steady. In 2016-2022, the company's revenue and net profit CAGR were 28.4% and 44.1%, respectively.

More than 90% of the company's current revenue comes from the power grid market, providing PLC modules and other products to the State Grid, China Southern Power Grid and solution providers, and expanding terminal products; in the non-grid market, the company lays out applications in the fields of integrated high-speed rail energy efficiency management, photovoltaics, smart homes, and smart lighting. The company issued convertible bonds and raised 380 million yuan to invest in product development and industrialization projects in the fields of photovoltaics and smart homes.

The grid market pattern has been optimized, and the non-grid sector has broad prospects. In the power grid market, PLC modules are mainly used for smart meters. Demand mainly comes from stock replacement. The total number of tenders for the State Grid and the Southern Grid is about 1-120 million blocks each year, and demand is relatively stable. In the dual-mode era, due to the increased requirements of the State Grid for suppliers and the optimization of the competition pattern, the company's share is expected to increase as one of the first suppliers to pass the State Grid inspection.

In the non-grid market, PLC technology has advantages such as no additional wiring, and has application potential in fields such as photovoltaics. In the PV market, North America and Europe have made it mandatory for distributed PV projects to have a fast module-level shutdown function (using PLC technology). If each PV panel is equipped with a chip calculation, the global demand is expected to exceed 400 million blocks per year. The company's chip and module products have passed SunSpec certification. As subsequent customers complete product certification, it is expected to be imported into overseas markets to achieve domestic replacement.

Technology and R & D capabilities are deeply accumulated, and costs and expenses are well controlled. The company is the only chip company in the market that has completely experienced all stages of the State Grid upgrade from narrowband microcontrollers to dual-mode (HPLC and HRF) upgrades. Benefiting from this, the company has accumulated deep technical and R&D capabilities, participated in the formulation of many national and industry standards, and passed the national grid dual-mode inspection in the first batch. At the same time, the company's costs and expenses were well controlled, and gross margin remained stable during the dual model period; the ability to reuse R&D personnel was strong, and the burden of R&D expenses was reduced. In the first half of 2023, the company's R&D expenses rate fell 4.0 pct month-on-month.

Net profit increased by 59% in the first half of the year, and there were plenty of orders on hand. In the first half of 2023, the company achieved revenue of 253 million yuan, an increase of 13.4% over the previous year, and achieved net profit of 51 million yuan, an increase of 59.4% over the previous year. The company is rich in orders. The total amount of contracts signed and winning projects in the first half of the year reached 307 million yuan, an increase of 63.81% over the previous year, laying the foundation for the company's development in the second half of the year.

Risk warning: grid demand falls short of expectations; non-grid market expansion falls short of expectations; industry competition intensifies.

Investment suggestions: The company's power grid market share increased steadily, with sufficient orders in the first half of the year; forward-looking product layout in the non-grid sector, and growth potential in photovoltaics and other fields. Based on this, it is estimated that the company's operating income for 2023-2025 will be 7.2/10.0/1.35 billion yuan, and net profit to parent will be 1.3/18/ 240 million yuan respectively. The current stock price corresponds to the current PE, respectively. It is covered for the first time and given a “buy” rating.