The domestic microwave electric vacuum device leader, with revenue and net profit growth rate of 37% and 58% in the past three years, the company is one of the main research and production bases for microwave electronic devices in China. Its main products include microwave devices, nuclear industry equipment and other products. The downstream is widely used in radar, satellite communications, nuclear industry and other fields. The customers are mainly research institutes and enterprises under China's major military industry groups. In 2022, the company's microwave devices, nuclear industry equipment and components business accounted for 53% and 40% of revenue, respectively, and 67% and 31% of gross profit, respectively.

Microwave devices: Benefiting from satellites, radars, and electronic countermeasures, the company expanded from vacuum devices to solid-state devices 1) Driven by national defense modernization and informatization construction, electronic equipment such as radar, satellite communication, and electronic countermeasures developed rapidly, and microwave devices continued to benefit as core components.

2) Market space: Microwave devices represented by T/R components are the core of phased array radars. The market size is expected to grow from 6.3 billion yuan in 2022 to 8.5 billion yuan in 2025, with CAGR = 10%.

3) Competitive pattern: The microwave electric vacuum device pattern is concentrated and stable, mainly “two factories and two sites” including the company. Among them, the company has technical advantages in continuous wave traveling wave tubes (mainly used for electronic confrontation) and agile frequency magnetrons (mainly used for ammunition), and the company is also continuously expanding horizontally towards solid-state devices.

Nuclear industry equipment: Controlled nuclear fusion circuits are booming, and the company has benefited from the construction of new experimental reactors 1) With the maturity of high-temperature superconducting technology in recent years, superimposed AI has surpassed expectations to improve the design and control efficiency of fusion devices, accelerating expectations for commercialization of controlled nuclear fusion, and capital market financing has repeatedly reached new highs. According to the Fusion Industry Association (FIA), in 2022, global private nuclear fusion companies accumulated financing amounts to US$4.86 billion, an increase of 139% over the previous year. As of the first half of 2023, this figure had reached US$6.21 billion.

2) On December 29, 2023, a controlled nuclear fusion innovation consortium composed of 25 state-owned enterprises, research institutes, universities, etc. was officially announced, and the China Fusion Corporation (planned) held an unveiling ceremony. The State Council's State-owned Assets Administration Commission has made it clear that controlled nuclear fusion is an important direction for future energy, and the country is taking the lead in promoting it from the top down.

3) The company's deflectors and cladding systems are key components of the International Thermonuclear Fusion Experimental Reactor Program (ITER) project, and have also been used in fusion projects such as HL-2M in China. In November 2023, Lianchuang Superconductivity signed an agreement with CNNC Fusion to adopt a new technology route to jointly build a fusion/fission hybrid test reactor project. The total investment of the project is expected to exceed 20 billion yuan, and the company and other relevant domestic suppliers are expected to continue to benefit.

Guoguang Electric: The compound net profit growth rate for the next 3 years is expected to be 18%. The company's net profit to the mother in 2023-2025 is estimated to be 1.2, 220, and 3.1 billion yuan, up -25%, 74%, and 44% year-on-year, and CAGR = 23%, corresponding to PE 67, 38, and 27 times. Covered for the first time, a “gain” rating was given.

Risk warning

1) Risk of price reduction for special microwave devices; 2) Nuclear industry equipment orders fall short of expectations.