Events:

According to the company's semi-annual report for 2023, the company achieved a total operating income of 167 million yuan (+ 7.66%), a net profit of 62 million yuan (+ 0.31%), and a net profit of 58 million yuan (- 2.62%).

Comments:

Production and sales increased steadily in the first half of 2023, and AI helped fight against drones. As a national specialized "Little Giant" enterprise and high-tech enterprise, the company is the earliest R & D and service provider of anti-drug products for drones in China. 2023H1, the company achieved a total operating income of 167 million yuan (+ 7.66%), a net profit of 62 million yuan (+ 0.31%), and a net profit of 58 million yuan (- 2.62%). In the second quarter, the company achieved a revenue of 124 million yuan (+ 4.86%) and a net profit of 54 million yuan (- 4.00%). The competitiveness of the company's main products and services continues to enhance, production and sales increase steadily. In the field of UAV anti-drug services, the company maintains the first-mover advantage and R & D investment, and uses artificial intelligence technologies such as machine learning and data mining to create an intelligent data platform suitable for anti-drug departments at all levels. In other areas of UAV services, the company fosters new application markets and creates new business models for end customers. In terms of UAV system, the company meets the diversified needs of customers and forms a relatively stable market. In terms of intelligent defense equipment, the company will strengthen the research and development capacity of new products and improve the R & D and verification system of different types of defense products.

With the improvement of quality and efficiency, the rate of "three fees" is reduced. 2023H1, gross profit margin (58.60% maxim 1.83pcts) and net profit margin (37.31% maxim 2.74pcts) decreased. The company improved quality and increased efficiency, and the three-fee rate (6.67% 2.07pcts 1.09pcts) decreased, of which the sales expense rate was 1.99% (+ 0.86pcts), which was mainly due to the increase in marketing efforts and business publicity expenses during the reporting period; the management expense rate was 5.69% (- pcts), mainly due to the decrease in depreciation and amortization of the company's management expenses and the reduction of intermediary consulting fees and hospitality fees after the subsidiary was put into production. The financial expense rate is-1.02% (+ 0.12pcts), mainly due to the decrease in interest income during the reporting period. In addition, the company's R & D investment increased, and the R & D expenditure rate was 7.81% (+ 2.90pcts).

The acceptance of the fund-raising project is consolidated, and the cash flow is under short-term pressure. The contract debt of 2023H1 is 8 million yuan (compared with the beginning of the period + 767.58%), and the inventory is 21 million yuan (compared with the beginning of the period-41.75%). The project under construction is 2 million yuan (compared with the beginning of the period-95.47%), and the fixed assets are 261 million yuan (compared with the beginning of the period + 12.17%). The acceptance and conversion of the company's investment project involves not only software and services, but also hardware products. as the project is put into production, the company's software and hardware capabilities will be improved, leading to a further increase in the production capacity of related products (services). Lay a solid foundation for revenue growth.

The net cash flow generated by 2023H1's operating activities was 28 million yuan (compared with the beginning of the period-73.39%), and notes receivable and accounts receivable totaled 204 million yuan (compared with the beginning of the period + 72.89%). The company's cash flow is under short-term pressure and is expected to improve after repayment.

Flight services and data processing have the advantage of first-mover in the industry, and the superior resources drive the growth of customer demand. The company's anti-drug service business covers 27 provinces, involving more than 100 government anti-drug unit customers, forming a first-mover advantage. At present, the company has accumulated about 4 million square kilometers of image data, and the increment is not less than 300000 square kilometers per year. At the same time, the company reuses the anti-drug service operation system in resource investigation, environmental monitoring and other business areas, which effectively reduces the activity cost. We believe that the company's revenue is expected to continue to grow in the future with the continuous increase in the number of customers and data coverage.

The achievements of some projects in the UAV system and intelligent defense equipment have been transformed. Through the core technology, flight data and standard production line, the company meets the diversified needs of customers and forms a relatively stable market. The company has complete military qualification and has carried out in-depth cooperation with military units in UAV integration, subsystem matching, new technology research and development, and some military projects have achieved the transformation of military business achievements. In addition, the company speeds up the transformation of the achievements of law enforcement equipment represented by intelligent rioters to fill the application gaps in the fields of maintaining stability and dealing with outbursts. We believe that the military business has the characteristics of high gross profit margin, and the company is expected to gradually thicken its performance and become a new profit growth point after realizing the transformation of multi-project results.

Investment advice:

1) the company is a leading provider of anti-drug services for drones in China, with a database of independent intellectual property rights and an intelligent data platform suitable for anti-drug departments at all levels, forming a significant first-mover advantage. 2) the company has complete military qualification and the ability to fully contract military business. Relying on advanced UAV production capacity, the company has carried out in-depth cooperation with military units in UAV integration, sub-system matching, new technology research and development, and some military projects have realized the transformation of military business achievements. We estimate that the net profit of the company from 2023 to 2025 is 1.1,1.5 and 180 million yuan respectively, and the corresponding valuation is 36.2X, 28.4X and 23.1x respectively. We maintain a "buy-A" rating with a dynamic price-to-earnings ratio of 40 times 2023, corresponding to a six-month target price of 12.40 yuan.

Risk hint: the development of military business is not as expected, and the expansion of downstream applications is not as expected.