Key points of investment

Event: On October 30, 2023, Zhenxin Technology released its report for the third quarter of 2023. In the third quarter, the company achieved operating income of 180 million yuan, a year-on-year decrease of 12.50%; net profit of 34 million yuan, a year-on-year decrease of 32.58%.

The overall business is developing steadily, and R&D investment continues to be at a high level. In the first three quarters of 2023, the company achieved operating income of 615 million yuan, a year-on-year decrease of 12.83%, and net profit of 143 million yuan, a year-on-year decrease of 32.64%. Looking at a single quarter, the company achieved operating income of 180 million yuan, a year-on-year decrease of 12.50%, and net profit of 34 million yuan, a year-on-year decrease of 32.58%. The company's revenue will be affected by inspection and other factors. Sales and orders for the company's integrated circuits and Beidou terminal products have maintained steady growth, and the vision business has also been carried out in an orderly manner and undertakes a number of development tasks. The company increased investment in R&D. The R&D expenses for the first three quarters of 2023 were 91 million yuan, an increase of 13.63% over the previous year.

As of June 2023, the company had 408 R&D personnel, accounting for 41% of the company's total personnel, and obtained 115 invention patents and 149 software copyrights.

Consumption recovery+domestic production+satellite boom, and the integrated circuit market is rising. The company has formed a multi-series and diversified product line based on core products. It has been successfully integrated into the supply chain systems of many well-known customers and has become a mainstream supplier in key fields such as domestic aviation communications. At the same time, the company has begun to reach substantial cooperation with leading customer groups in the high-end testing market and instrument market. The company's products can also support users in communications, automobiles, computers, intelligent manufacturing and other industries with high-end integrated circuit products, including converters, clocks, video interfaces, etc. With the slow recovery of the consumer market, the new energy vehicle and intelligent manufacturing industries are booming, and the construction of satellite Internet is imminent. It is expected that overall demand in the integrated circuit product market will continue to grow steadily. The company adheres to independent research and development of core technologies and the high cost effectiveness of products. It has stable technology research and development, market capabilities and technical teams, and design, development and supply chain support capabilities. The six key series of chip products have won market recognition and become mainstream suppliers in key domestic industries. In the first three quarters of 2023, the integrated circuit business achieved revenue of 348 million yuan.

Establish a full-chain product system for Beidou and promote new applications in the Beidou industry. The company has been deeply involved in the Beidou satellite navigation industry for more than 20 years, developed satellite navigation chips and equipment, has the technical advantages of core chips and independent intellectual property rights for key technologies, and has built the entire “component-terminal-system application” industry chain of Beidou satellite navigation. The company actively promotes technical verification and product implementation of the third generation of Beidou products, and provides comprehensive PNT system solutions around the construction of a new space-time system. The company helps “Beidou+” integrate innovation and the development of “+ Beidou” space-time applications, focuses on promoting Beidou operation services in hydrogeological exploration, urban rail transit, safety and emergency, etc., and provides relevant organizations with Beidou third-generation communication cards, GNSS equipment, hardware development and platform operation and maintenance services. In the first three quarters of 2023, orders for Beidou third-generation terminals and modules signed by the company increased significantly, but due to factors such as testing and acceptance of Beidou terminal products, product delivery was delayed. In the first three quarters of 2023, the integrated Beidou navigation application business achieved revenue of 140 million yuan.

AI+ avionics integration applications, vision products may shape new growth poles. In the smart city construction and operation business, the company won bids for a number of video surveillance system renovation and sensor source construction projects, and carried out video surveillance system project renovation and construction work in various districts and counties of Chengdu. In the field of avionics and AI intelligent products, the company is developing and mass-producing visual intelligent products around the direction of intelligent applications of unmanned platforms, focusing on the layout of the airborne ancillary equipment market and transforming into an artificial intelligence solution provider and service provider. The company researches autonomous navigation technology for unmanned systems at home and abroad, masters core technologies of unmanned systems such as image recognition, image navigation, and cluster control, and has independent intellectual property rights for video image processing algorithms. Intelligent visual products are expected to become a new growth point for the company's performance. In the first three quarters of 2023, the company's smart city construction and operation service business achieved revenue of 127 million yuan.

Investment advice: Over the years, the company has been committed to providing products and services around the “component-terminal-system” industry chain around Beidou satellite navigation applications. Benefiting from the rapid development of satellite Internet and the acceleration of Beidou 3rd generation applications, the company has huge potential opportunities. We forecast operating income of 11.87/15.48/1,985 billion yuan in 2023-2025, a year-on-year increase of 0.4%/30.4%/28.3%, respectively, net profit of 2.58/3.78/501 billion yuan, a year-on-year increase of -14.0%/46.5%/32.4%, corresponding to EPS of 0.46/0.67/0.89 yuan, and PE of 53.8/36.7/27.7, covering the first time, giving it an “increased holding” rating.

Risk warning: The development of satellite Internet fell short of expectations, Beidou third-generation applications fell short of expectations, market competition intensified, business development fell short of expectations, and project delivery, inspection and repayment progress fell short of expectations.