Key points of investment:

China Shipbuilding Group Research Institute's core asset listing platform. The product gross margin is high after two rounds of capital operation in history. The company is positioned as the Group's only military hydroacoustic electronics listing platform, wholly-owned 6 subsidiaries, which are 715 Research Institute, 726 Research Institute, 716 Research Institute, and Jerry Group's core assets. The company's products are located in the middle and upper reaches of the industrial chain, mainly the China Shipbuilding Research Institute; the main business is hydroacoustic electronics, special electronics, and electronic information. The overall gross margin of the products is about 30%, of which military products account for 70%.

The sonar industry is expected to fully benefit from the accelerated development of underwater equipment. The industry to which the company's main military products business belongs is the sonar industry. Sonar is often installed as a sensing device on various water surfaces and underwater platforms for underwater detection, communication, navigation and confrontation. The main demand for sonar in various countries is the Navy, which accounts for a relatively small share of the civilian sonar market. Due to the early development of traditional maritime powers such as Europe, America, and Russia, sonar technology is now quite mature, and our country is in a period of catching up with technology after autonomy. With the increase in demand for future ship equipment and underwater unmanned equipment, and the upgrading of the performance of old models, the industry is expected to enter an upward boom period due to the continuous demand for sonar maintenance brought about by the increase in the total tonnage of ships.

The company has deep barriers and steady operation

The company is located in the middle and upper reaches of the industrial chain. The downstream is mainly China Shipbuilding Research Institute, university research institutes, navy, etc. The majority shareholders take orders for military products, and have a high market share in the military sonar field. The military goods business is the main source of performance, of which the hydroacoustic electronics business accounts for about 40%. Demand for military products and the pace of revenue recognition in 2023-2023 fell short of expectations and affected the decline in business growth, but the gross profit margin remained high, indicating that the company's profitability was outstanding. 2022 is the first year of accelerated development of underwater attack and defense technology. As an industry leader, China's coastal defense may fully benefit from the development of the industry in the next few years. Currently, only about 50% of the production capacity construction of the company's 2019 fund-raising project has been completed, and there is room for further release in the future.

Profit Forecasts, Valuations, and Ratings

We expect the company's revenue for 2023-2025 to be 40.45/51.71/6.130 billion yuan, respectively, with year-on-year growth rates of -5.74%/27.81%/18.56%, net profit to mother of 4.89/7.17/ 917 million yuan, year-on-year growth rates of -16.34%/46.51%/27.94%, EPS 0.69/1.01/1.29 yuan/share, respectively, and a 3-year CAGR of 16.18%. Given that the company is a leader in the naval equipment information technology industry and has a high product market share, the company's average PE in 2024 was 31.63 times, and the absolute valuation was 31.71 yuan per share. Based on the comprehensive absolute valuation and relative valuation, the company was given 30 times PE in 2024, with a target price of 30.27 yuan. For the first time, coverage gave it a “buy” rating.

Risk warning: Naval equipment procurement falls short of expectations; industry competition intensifies; R&D progress falls short of expectations