Investment highlights

For the first time, 712 (603712) was covered to give the industry an outperforming rating. The target price was 41.17 yuan. Based on the PE valuation method, the corresponding valuation was 30x P/E in 2024. The company is deeply involved in private network wireless communication business, and is one of the few leading enterprises in the field of special wireless communication that can fully cover different application fields. The reasons are as follows:

It is a core supplier in the field of special wireless communication, and its performance has maintained good growth. Benefiting from the construction of special information technology, the installation of special communication equipment has increased, and the company's performance has grown rapidly. In 2018-2022, revenue CAGR reached 25.6%, and profit CAGR reached 36.2%. 1-3Q23's revenue was 2.27 billion yuan, YoY +2.4%, net profit to mother of 310 million yuan, YoY +2.1%. Affected by phased adjustments in downstream demand, the performance growth rate fluctuated somewhat. We believe that in the future, as the construction of special information technology accelerates and the company's product form is upgraded, the company's performance is expected to grow rapidly.

Communications is a key direction for special informatization construction, and technological iteration drives the need for large-scale equipment updates.

1) Communication systems are the nerve center of special activity command. The US plans to invest 14.5 billion US dollars in C4I system procurement in 2024, +13% over the same period. This is a key direction for special informatization construction.

We believe that the C4I system procurement budget is growing rapidly, reflecting the importance of building information systems in special fields. 2) According to Intelligent Research and Consulting, the size of China's special information technology market increased from 81.4 billion yuan to 105.7 billion yuan in 2016-2020, with a CAGR of 7%. We believe that with the acceleration of information technology construction in special fields in China, the size of the domestic special communications market is expected to continue to grow.

A rich product line provides multiple growth poles, and mechanism optimization strengthens development momentum. 1) The company's product spectrum is complete, and the product form gradually extends from terminals to system-level products. We believe this will increase the value of the company's products. 2) The company has maintained a R&D cost rate of more than 20% over the past 5 years, leading its peers in R&D investment intensity, which helps strengthen the company's competitive advantage. 3) The company grants a total of no more than 21.616 million stock options to core management, accounting for 2.8% of the total share capital; implementing follow-up investment incentives for core executives and establishing a joint venture to establish Guiyang Xinluo Electronics. We believe this will fully motivate employees and help the company develop steadily over the long term.

What is our biggest difference from the market? Some investors believe that the company's downstream market space is limited and are concerned about the company's future growth. We believe that special communications will be the focus of investment in the development of equipment in special fields. The acceleration of information technology construction and the upgrading of the company's product form are expected to help the company achieve rapid development.

Potential catalysts: Accelerated informatization construction in special fields; improved profit margins exceeded expectations.

Profit forecasting and valuation

We expect the company's 2023-2025 EPS to be 1.04/1.37/1.81 yuan, respectively, and a CAGR of 22%.

The company's current stock price corresponds to 2024/2025 23/18x P/E. We believe that the company is expected to benefit from the trend of upgrading wireless communication technology in special fields, and has long-term growth potential. For the first time, coverage was given a “outperforming industry” rating, and a target price of 41.17 yuan was given, corresponding to 30x P/E in 2024, with a potential increase of 29%.

risks

Macroeconomic environmental risks; technological innovation R&D investment risks; market competition exacerbates risks.