2023 results fall short of market expectations

The company announced its 2023 results: achieved operating income of 3.268 billion yuan, YoY -19.11%; realized net profit to mother of 404 million yuan, YoY -43.25%. Looking at a single quarter, 4Q23 achieved revenue of 1,002 billion yuan, YoY -45.14%; realized net profit to mother of 132 million yuan, YoY -72.04%. The performance fell short of market expectations, mainly due to the slowdown in the pace of downstream demand due to the “14th Five-Year Plan” mid-term adjustments.

Development trends

The pace of industry demand is affecting delivery, and profitability is under pressure in the short term. 1) Operating performance: In 2023, the company's dedicated wireless communication terminal products/system integrated products achieved revenue of 19.36/1.04 billion yuan, YoY -15.63%/-22.96%, gross margin of 49.82%/28.62%, respectively, a year-on-year decrease of 1.13/11.66ppt. Affected by the mid-term adjustments of the industry during the “14th Five-Year Plan” and the fact that scientific research results have not yet been fully transformed, the company's business performance declined. 2) Profitability: In 2023, the company's gross and net sales margins were 41.85%/13.46% respectively, down 4.74/5.72ppt from the previous year. Along with the decline in sales volume, profitability was under pressure.

Investment in R&D continues to increase, and cash flow from operating activities is disrupted by repayments. 1) Period expense ratio: The company's expense ratio increased 2.53 ppt to 29.90% year on year in 2023: Among them, the sales expense ratio increased 0.89ppt to 2.67% year on year, mainly due to the company's increased market development efforts and increased sales investment; the R&D expense ratio increased 0.56 ppt to 20.6% year on year, and R&D investment continued to increase. 2) Cash flow: The net cash flow from the company's operating activities decreased by 82 million yuan to -37 million yuan in 2023, and the company's sales repayment declined year-on-year due to the influence of the industry settlement cycle.

Equity incentives and investment sites drive long-term development, and new data chain products open up new growth space. 1) In December 2023, the company announced the implementation of a stock option incentive plan and project follow-up incentive plan. At the same time, the company promoted the implementation of major industrial chain integration projects. This follow-up project, Guiyang Xinluo Electronics is mainly engaged in module business and is one of the company's upstream expansion projects. We believe that the future will help the company develop simultaneously in supply chain management, technical cooperation, product collaboration, and market expansion.

2) The company won the bid for joint general-purpose data link shipborne equipment, a collaborative data terminal for an aviation communication platform, multiple terrestrial communication equipment projects, and a next-generation communication system for a certain platform. The company has made breakthrough progress in the field of data link communication, and the new products are expected to open up new growth space for the company.

Profit forecasting and valuation

Taking into account the company's downstream demand adjustments and the company's product delivery situation, we lowered our 2024 net profit forecast by 31.8% to 723 million yuan, and introduced a net profit forecast of 904 million yuan for 2025. The current stock price corresponds to 24.5/18.6x P/E 2024/2025. Considering that the company won the bid for several new products, it is expected that performance will gradually be released, and we maintain the industry performance rating. We lowered our target price by 28.9% to 29.29 yuan, corresponding to 2024/2025 31.3/25.0x P/E, a potential increase of 28.4%.

risks

1) Downstream orders fall short of expectations; 2) Technological innovation R&D investment risk; 3) Market competition increases risk.