Incident: The company released its 2023 annual report on April 17, and achieved annual revenue of 3.56 billion yuan, YOY -7.2%. The main reason for the decline was due to tax policy adjustments in 2023; net profit to mother was 190 million yuan, YOY +3.9%; deducted non-net profit of 180 million yuan, YOY +26.7%. The performance was in line with market expectations. In 2023, the company's economic efficiency grew steadily, and the economy continued to maintain a steady, moderate and excellent high-quality development trend.
4Q23 revenue increased 17%; profitability improved in 2023. 1) Looking at a single quarter: In 4Q23, the company achieved revenue of 1.17 billion yuan, YOY +16.8%; net profit to mother of 7.2955 million yuan, YOY -75.9%; deducted non-net profit of 272,500 yuan, compared to 305.17,400 yuan for the same period last year. 2) Profitability: The company's gross margin increased by 3.2ppt to 24.8% year on year in 2023; net profit margin increased 0.3 ppt to 7.0% year on year. The company has effectively improved its operating efficiency, and its profitability has improved. 3) Business plan: In 2024, the company expects to achieve revenue of 3.8 billion yuan, YOY +6.6%; total profit of 290 million yuan, YOY +3.2%.
The gross margin of dual-use military and civilian products increased; the profits of the subsidiary Hengyang Electric grew rapidly. In 2023, 1) Product side: Revenue of dual-use military and civilian products was 3.46 billion yuan, YOY -7.3%; gross margin increased 2.71 ppt to 24.2% year-on-year. 2) Customer side: The company's top five customers had sales of 2.74 billion yuan, accounting for 79% of total revenue; of these, related parties had sales of 2.45 billion yuan, accounting for 71% of total revenue. The largest customer, Weapons Group System3, had sales of 18.01 billion yuan, accounting for 52% of total revenue. In 2023, subsidiaries: 1) Hengyang Electric: Revenue increased 13.2% year on year to 220 million yuan, net profit increased 168.5% year on year to 70 million yuan; 2) Zhongbing Communications:
Revenue decreased 16.4% year over year to 450 million yuan, and net profit decreased 38.7% year on year to 50 million yuan; 3) China Military Aviation Union: Revenue decreased 5.7% year over year to 330 million yuan, and net profit increased 4.7% year on year to 50 million yuan.
The cost ratio is relatively stable; increase research and development to enhance the ability to transform scientific and technological achievements. The expense ratio increased 1.0ppt to 14.8% year over year in 2023:1) the sales expense ratio decreased by 0.003ppt to 2.1% year over year; 2) the management expense ratio increased by 0.2ppt to 6.5% year over year; 3) the financial expense ratio was -0.6%, compared to -0.5% in the same period last year; 4) the R&D expense ratio increased 1.0ppt to 6.9% year over year. By the end of 2023, the company: 1) accounts receivable and notes of $3.62 billion, up 43.1% from the beginning of the year; 2) prepayments of $0.2 billion, a decrease of 41.1% from the beginning of the year; 3) inventory of $420 million, a decrease of 30.4% from the beginning of the year; 4) contract liabilities of $50 million, a decrease of 17.7% from the beginning of the year. Net cash flow from operating activities in 2023 was $200 million, YOY -57.4%, mainly due to a year-on-year decrease in cash received from sales products and a year-on-year increase in payment of VAT and VAT surcharges.
Investment advice: The company belongs to the Ordnance Industry Group and is a core supplier of “navigation control and ammunition information technology” in China. As the level of equipment informatization increases, the company's products are expected to rise sharply in volume and price. At the same time, the company divested non-performing assets to further focus on its main business and actively implemented equity incentives, which have great potential for high-quality enterprise development and improving quality and efficiency. We expect the company's net profit from 2024 to 2026 to be 253 million yuan, 333 million yuan, and 436 million yuan respectively. The current stock price corresponding to 2024-2026 PE is 50x/38x/29x, respectively. We maintain the “Recommended” rating, considering the development space of the company's core business and the potential to improve the profitability of high-quality development.
Risk warning: Product development falls short of expectations, downstream demand falls short of expectations, etc.