Incidents:

The company published its 2023 annual report. According to the company's announcement, revenue of 2,616 billion yuan (yoy -4.30%) was achieved in 2023, net profit attributable to mother was 349 million yuan (yoy -62.21%), and net profit not attributable to mother was 269 million yuan (yoy -43.58%).

The company achieved revenue of 754 million yuan (yoy -7.50%) and net profit to mother of 57 million yuan (-114.45%) in 2023Q4.

The 2023 results fell short of market expectations.

Comment:

Fluctuations in demand affect short-term revenue, and the aviation and navigation satellite Internet business is progressing rapidly. According to the company announcement, the company achieved revenue of 2,616 billion yuan (yoy -4.30%) in 2023. According to our analysis, 1) Affected by downstream demand and increased competition in overseas markets, the company's revenue declined slightly, with domestic revenue of 1,954 million yuan (yoy -3.74%) and overseas revenue of 662 million yuan (yoy -5.93%) in 2023. 2) The company actively expands overseas markets, continuously enriches “satellite communication+drone” services, adds value-added service packages such as maintenance and guarantees, and has achieved new breakthroughs in high-throughput satellite and other businesses in new international markets. 3) The aviation and navigation market is expanding at an accelerated pace. In the aviation sector, it was successfully included in the Civil Aviation Administration's front and rear cabin collaborative application pilot project to provide satellite internet services for airlines; in the navigation field, China Star 26 was included in the global network to supplement regional coverage in South America, and more than 100 high-value commercial ships and passenger ships were added, and the number of ships on the network exceeded 9,000. We believe that the company relies on high-throughput satellite constellations to actively expand downstream application fields, and that the company's satellite Internet business is expected to usher in “0-1”, driving rapid revenue growth.

The company's performance was under pressure due to the failure of the satellite in orbit to calculate asset impairment losses. According to the company announcement, the company's gross margin in 2023 was 35.71%, down 0.76pcts from 2022, and the net margin was 19.46%, down 20.20pcts from 2022.

According to our analysis, 1) the decline in gross margin is mainly due to increased competition in overseas markets. The gross margin of domestic business was 40.72% in 2023, up 1.00 pcts from 2022, and the overseas gross margin was 20.91%, down 6.18 pcts from 2022; 2) The decline in net interest rate was mainly due to large asset impairment losses, which accrued asset impairment losses of 268 million yuan due to the failure of the Zhongxing 6C satellite thruster. The company has initiated insurance claims procedures in accordance with the terms of the insurance policy, which are currently being actively promoted. Our analysis believes that as the company continues to improve management efficiency, enhance product competitiveness and market development, future performance is expected to resume growth.

Contract liabilities remain high and cash flow is abundant, and future performance is guaranteed. According to the company's announcement, as of the end of 2023, the company's contract debt was 964 million yuan, which remained high, indicating strong downstream demand; the company's cash flow was stable, with a cash balance of 3.06 billion yuan at the end of 2023, and a low balance ratio of 14.05% at the end of 2023. The company operates steadily and has plenty of orders in hand, and future performance growth is guaranteed.

Domestic satellite communication operation core enterprises are fully benefiting from the acceleration of satellite Internet applications. 1) It has a communications operation license issued by the Ministry of Industry and Information Technology and 17 satellites in orbit, and has a stable position in the industry; 2) The aviation and navigation business has expanded rapidly. According to the company's announcement, by the end of 2023, the deployment and modification of multiple narrow-body aircraft networks has been completed, and the number of “Haixingtong” platform has exceeded 9,000 ships; 3) the Zhongxing 26 satellite was successfully launched, with a single satellite capacity exceeding 100 Gbps. The first high-orbit satellite Internet fully covering the entire territory of China and the “Belt and Road” key regions was initially built. Currently, the domestic satellite Internet is a “0-1” process. As the number of aviation and maritime users expands, the satellite Internet business will become the core driving force for the company's performance growth.

The 2024E profit forecast was downgraded and downgraded to an “overweight” rating. Considering that competition in overseas markets is intensifying and compounding changes in the company's gross margin, and that the company is advancing the development plans for the China Star 10R and China Star 9C satellites and supporting rockets, depreciation and amortization costs may increase further, we lowered the company's net profit forecast for 2024E to 547 million yuan (previous value was 1,084 million yuan), and the net profit forecast for 2025-2026E was 649/783 million yuan. The current stock price corresponds to PE 116/100/79 times, respectively. Referring to the company's PE/PB-band from July 2019 to the present, the historical average of PE (TTM) is 111X. Considering that China Satellite Communications is a basic telecommunications operator with autonomous and controllable commercial communication and broadcasting satellite resources in China, it is the core enterprise for domestic satellite communication operations, and the company is expected to fully benefit from the acceleration of satellite Internet applications, so the company is expected to fully benefit, so it has been downgraded to an “increase” rating.

Risk warning: Satellite applications fall short of expectations; order demand falls short of expectations; competition increases risk.