Announcement summary: The company released its 2023 three-quarter report. The first three quarters achieved revenue of 216 million yuan, a year-on-year decrease of 44.05%, a year-on-year net loss of 63 million yuan, a year-on-year decrease of 170.28%, and a net loss of 85 million yuan after deduction, a year-on-year decrease of 209.67%.

Short-term performance is under pressure, and network chain businesses are developing smoothly. Looking at a single quarter, the company achieved revenue of 69 million yuan in 23Q3, down 65.91% and 0.04% from the previous year, down 65.91% from the previous year, the net loss from the previous year was 48 million yuan, down 172.81% from the previous year, and the net loss after deducting net loss of 500 million yuan from before going back to the mother, a year-on-year decrease of 183.63%. The comprehensive gross profit margin for the first three quarters was 43.87%, a year-on-year decrease of 15.95pct, period expenses of 171 million yuan, a year-on-year increase of 28.46%, and a year-on-year increase of 44.56pct in revenue, mainly due to a year-on-year increase in R&D expenses of 62.84% to 147 million yuan, a year-on-year increase of 67.83% of revenue, a year-on-year increase of 44.52pct, and sales/management/financial expenses falling 3.94%/5.39%/109.28% year on year. The first three quarters were affected by external factors. The company's broadband mobile communication equipment sales revenue declined, and investment in new business expansion was compounded. There were short-term fluctuations in performance, new products and projects were carried out in an orderly manner, and various model development projects in the traditional special broadband communication business field progressed smoothly, effectively consolidating the company's leading position in the industry and helping expand the scope of product allocation to team levels and individual soldiers. At the beginning of the “14th Five-Year Plan”, the company began actively developing network chain business. As of 23H1, it has obtained four model development tasks, including various information equipment networking and fire control. It will complete certification and begin batch assembly from the end of this year to next year. At the same time, it is actively cooperating with various general and platform units to develop various types of communication, monitoring and control equipment for use in drones, unmanned vehicles, and unmanned ships, and has performed well in various demonstration tests. We believe that the long-term trend of national defense informatization has been determined, and that the company's forward-looking layout of new projects and new businesses will provide a guarantee for medium- to long-term development. With the transformation of R&D results and the improvement of the external environment, performance is expected to gradually recover.

Increase investment in research and development to achieve the layout of the entire industry chain. The company has participated in the formulation of industry-related standards for a long time and participated in the development of a “General Equipment Model Development Project for Broadband Mobile Communication Systems in the Industry” as an overall technical unit to promote the evolution of customer communication equipment from narrowband to broadband. The company focuses on the accumulation of core technology and innovative capabilities, and focuses on research on key technologies for broadband mobile communication. As of the end of 23H1, it has 38 core patents, 115 software copyrights, independent and controllable core intellectual property rights, and rapid customized R&D capabilities. The next-generation broadband information system developed is based on customer needs, fully absorbs leading civil technology, and has proposed and completed China's next-generation motorized, broadband, and multi-service regional broadband access system network system. It has gradually become a powerful means for China to achieve rapid mobile broadband information coverage in the region, and is continuing to evolve as a global Mobile deployment of broadband joint information systems that meet the strategic needs of the Belt and Road countries. In response to the special needs of customer applications, based on civilian 4GTD-LTE, a series of technological innovations and breakthroughs have been achieved in high-mobility long-distance communication, self-organized networking communication, spectrum sensing, broadband anti-interference communication, and system self-synchronization, etc., and the competitive advantage and influence in the industry continues to expand. The company has formed a “chip-module-terminal-base-station-system” industry chain layout to achieve autonomous and controllable R&D and production. It has ranked first in performance in customer broadband mobile communication project evaluations many times, and is in a leading position in terms of technical reserves, commercialization capacity, number of models and equipment, and market share.

The construction of “G60 Starlink” is advancing, and the satellite Internet industry chain is welcoming development opportunities. Resources in the low-Earth orbit band are scarce, and space orbits and frequency bands have become the focus of competition among countries. Satellites have entered an intensive launch period, and the market space is vast. The “G60 Starlink” plan was released in November 21. Shanghai and the nine major cities in the Yangtze River Delta will build the country's first satellite Internet industry cluster. The first phase of the project will build a digital satellite manufacturing plant, satellite in-orbit monitoring and operation center, and satellite Internet operation center. The industrial base design capacity will reach 300 units/year, and the cost of a single star will drop by 35%. It is expected to be put into use in 2023, and completed during the “14th Five-Year Plan” period Global low-orbit satellite communications constellation. The recently released “Shanghai Action Plan to Further Promote New Infrastructure Construction (2023-2026)” mentions that a “Tian-Earth” satellite Internet will be deployed to steadily promote the implementation of innovative commercial constellation networking and smart skynet projects. With policy support, the “G60 Starlink” construction is expected to accelerate. The Sound-Earth integration, space-space, and Haitian integrated networks have become the next generation of communication trends. Huawei released the Mate60Pro as the world's first smartphone that supports satellite calls, SpaceX Starlink launched a satellite direct mobile phone service in October, and plans to launch SMS services in 2024 to provide voice, data, and IoT applications in 2025. We believe that direct mobile phone connection will become one of the important commercial applications of satellite Internet. The implementation of the scenario is conducive to technology monetization, improving the economy of satellite systems, and opening up industrial space. The satellite Internet is still in the early stages of development. Upstream satellite manufacturing and launch and ground station construction will be the first to benefit. As a leader in military communications broadband, the company is expected to participate in the satellite communications industry chain and broaden growth boundaries.

Investment advice: Defense informatization is an important direction of military expenditure. With the modernization of military equipment, military communications will be upgraded from narrowband to broadband, and the military broadband communications market will usher in rapid growth, and the company is expected to fully benefit. Considering the short-term slowdown in downstream order delivery and increased spending on new projects, subsequent new business expansion is expected to bring elasticity to performance. We have adjusted our profit forecast and estimated that the company's 2023-2025 net profit will be 92 million/351 million/655 million yuan (original forecast value was 247 million yuan/401 million/684 million yuan), and EPS is 0.15 yuan/0.56 yuan/1.04 million yuan respectively, maintaining the “buy” rating.

Risk warning: military broadband market development falls short of expectations; satellite Internet construction falls short of expectations; market competition intensifies