From 2023Q1-3, the company achieved revenue of 399 million yuan, +15.52% year-on-year, net profit of 62 million yuan, +38.20% year-on-year; 2023Q3 operating income of 94 million yuan, +25.03% year-on-year; and realized net profit of 221 million yuan, turning a loss into a profit in a single quarter. As a core supplier of embedded military computers, with long-term supporting experience and excellent R&D and management capabilities, Zhimingda expects the core to benefit from rising downstream demand and outsourcing trends. At the same time, downstream companies such as Starship are expected to open up new growth space and maintain “buy” ratings.

Revenue growth is steady, and gross margin is under pressure. From 2023Q to 3, the company achieved revenue of 399 million yuan, +15.52% year-on-year; realized net profit of 62 million yuan, +38.20% year-on-year; and realized net profit of 29 million yuan after deduction of non-return to mother, -30.45%. Or affected by sales structure, localization, and demand-side pricing, etc., 2023Q1-3 gross margin was -9.89pcts year-on-year to 45.17%. On the cost side, the company's sales expenses for 2023Q1-3 were +19.15% to 225 million yuan, R&D expenses were +2.11% to 89 million yuan, and management expenses were -3.70% to 30 million yuan, resulting in an overall period cost rate of -0.75pct to 14.09% year on year. At the same time, the company transferred part of Minkos Microelectronics's shares in 23Q3. A single transaction generated investment income of about 225 million yuan, resulting in a total investment income of about 115 million yuan from 23Q1 to 3. Combining the above effects, the company's net profit margin for 2023Q1-3 was +2.54pct year-on-year to 15.45%. In the third quarter alone, the company achieved operating income of 94 million yuan, +25.03% year-on-year; realized net profit of 21 million yuan, turning a loss into a profit in a single quarter.

Ongoing orders are increasing, and cash flow is expected to improve. At the end of 23Q3, the company's inventory size was +5.37% compared to the beginning of the period to 353 million yuan, and the contract debt was +652% compared to the beginning of the period to 1.97 million yuan, which may indicate that the company is actively preparing goods and production.

According to the company's publicly disclosed records of investor relations activities, as of September 30, 2023, the company had orders in hand of 550 million yuan (including oral orders), which is +3.7% compared to the order size at the end of 23H1. The company's on-hand orders are gradually increasing, or it may indicate that downstream demand is gradually recovering. At the end of 23Q3, the company's accounts receivable was +33.99% compared to the beginning of the period to 615 million yuan, and the net operating cash flow from 23Q1 to 3 was -72 million yuan. Considering that the company's downstream customers are mainly the military, the credit quality is high, and repayments are mostly concentrated in the fourth quarter, the company's cash flow situation is expected to improve.

The debt-convertible fund-raising project increases production capacity and R&D capabilities, and Starship may become the second growth curve. According to the convertible bond raising instructions (application draft) issued by the company on October 24, 2023, the company plans to issue the company's convertible bonds to unspecified targets and raise a total of 401 million yuan in capital for embedded computer capacity expansion supplementary investment and construction projects, R&D center upgrade and construction projects, and supplementary working capital. Among them, the total investment in the embedded computer capacity expansion project is about 394 million yuan, and the proposed use of raised capital is 221 million yuan; the R&D center upgrade construction project has a total investment of 61 million yuan, and the proposed use of raised capital is 600 million yuan. We believe that the fund-raising project will effectively mitigate the risk that the company will have insufficient business space in the future. Among them, the embedded computer capacity expansion project will effectively enhance the company's production capacity and rapid response capacity, while the expansion of R&D sites and the introduction of advanced R&D and experimental equipment are expected to further enhance R&D capabilities and shorten the R&D cycle. After the implementation of the subsequent fund-raising project, it is expected to lay the foundation for the company's long-term development.

According to records of investor relations activities publicly disclosed by the company, the company is currently participating in satellite-related projects. The space-borne projects it undertakes are low-orbit communication satellites, mainly mission systems, and will be gradually mass-produced in the future as downstream volume is fixed. Considering the broad prospects of satellite Internet, we believe that the space-borne sector may become the company's second growth curve.

Risk factors: Demand for weapons and equipment falls short of expectations; demand for internal and external cooperation within the system is weakening; risk of downstream price reduction; risk of rising raw material costs; risk of insufficient technological development capacity of the company; risk of fluctuations in corporate orders; risk of fluctuation in corporate orders; risk that capital conversion projects do not progress as expected, etc.

Profit forecast, valuation and rating: Considering fluctuations in downstream demand and price reduction pressure in the aerospace sector, we lowered the company's net profit forecast for 2023/24 to $1.15/132 million (previous forecast value of $19/260 million), adding a net profit forecast of $19/260 million for 2025, and a corresponding EPS forecast of $1.53/1.75/2.54, respectively. The current stock price corresponds to PE 35/31/21x. Jingjiawei, Rayco Defense, and Xinleineng were selected as comparable companies. Currently, the comparable company Wind unanimously expects an average PE of 45x in 2024. Benefiting from the release of aerospace weapons and equipment and the increase in the level of informatization, the military embedded computer industry is expected to usher in rapid development. Under the trend of institutional and external collaboration within the system, private enterprises within the industry will usher in golden opportunities for development. As a core supplier of embedded military computers, with long-term supporting experience and excellent R&D and management capabilities, Zhimingda expects the core to benefit from increased downstream demand and outsourcing trends. At the same time, downstream companies such as Starship are expected to open up new growth space. The company was given a target PE of 45x in 2024, corresponding to the target market value of 6 billion yuan and the corresponding target price of 79 yuan, maintaining the “buy” rating.