For the first time, we covered China's scarce air defense warning radar leader: Aerospace Nanhu (688552.SH), and gave it a “recommended” rating. The main reasons are as follows:

Years of capital operation to build a marketing platform for the assembly of scarce air defense warning radars. In 1989, the company's predecessor, the nationally owned enterprise “Shashi Nanhu Machinery General Factory”, was established. The restructuring work was initiated in 2015, the reform and restructuring was completed in 2017, and successfully listed in 2023. The company has been deeply involved in the defense radar industry for more than 30 years and has a complete radar manufacturing system. It has now formed a diversified development pattern covering products such as air defense warning radars and their supporting equipment, air control radars, etc., and various products are included in domestic/foreign/commercial markets.

Focus on the main radar business, domestic and foreign trade two-wheel drive. 1) In terms of performance, from 2019 to 2022, the company's revenue increased from 670 million yuan to 950 million yuan, CAGR = 12.6%; net profit to mother increased from 90 million yuan to 160 million yuan, CAGR = 21.8%, which is a relatively rapid development. Furthermore, the company has been actively exploring overseas markets since 2022, and the layout results have gradually been reflected. The first half of 2023 achieved military trade revenue of 110 million yuan (the full year of 2022 achieved military trade revenue of 0.3 million yuan), and the future boom is expected to continue. 2) In terms of R&D, from 2019 to 2023Q1-3, the company's R&D cost rate increased from 8.3% to 19.8%. The company attached importance to R&D investment and was effective. It has a complete air defense warning radar manufacturing system, and has mastered core technologies such as phased array radar overall design, software-based radar, adaptive anti-interference, target classification and identification, high mobility high integrated structure design, phased array antenna design, and transceiver module design. It has helped the company win the bid for development projects in the field of multi-type air defense warning radar.

Demand for equipment continues to grow, and the military and civilian sectors have brought new volume to the company's development. 1) The “14th Five-Year Plan” and “15th Five-Year Plan” are important periods for mass production and structural adjustment and upgrading of China's new aviation equipment. Radar equipment, as an important part of informatization construction, may be expected to accelerate development. According to Guoguang Electric's prospectus data, it is estimated that by 2025, the size of China's radar equipment market is expected to reach 56.5 billion yuan. As China's leading air defense warning radar, the company is expected to accelerate development. 2) The equipment went overseas and brought new volume to the civilian sector. Since the 14th Five-Year Plan, China has gradually relaxed restrictions on exports of some major equipment, advanced equipment has begun to go abroad, and the company may be expected to take advantage of the trend. In addition, the company is currently actively deploying and being effective in the air traffic control radar direction. In 2023, it has bid for a user's air traffic control radar supporting equipment development project, which has great potential for future development.

Investment suggestion: The company is a scarce complete air defense warning radar development unit in China, and is a national-level specialized, refined and new “little giant” enterprise. Benefiting from the continued increase in domestic demand for equipment, and driven by demand for equipment going overseas and in the civilian sector, the company's performance is expected to continue to rise in the next few years. We estimate that the company's net profit from 2023 to 2025 will be 103 million yuan, 207 million yuan, and 268 million yuan, respectively. The current stock price corresponding to 2023-2025 PE is 61x/30x/23x. Considering the company's downstream demand boom and the advantages of the company's radar manufacturing industry chain layout, we covered it for the first time and gave it a “recommended” rating.

Risk warning: Downstream demand falls short of expectations, changes in prices and profit margins, risk of technology backwardness, etc.