Key points of investment

Incident: On April 23, 2024, Holevo released its 2023 annual report. In 2023, the company achieved operating income of 394 million yuan, an increase of 17.26% over the previous year, and realized net profit of 27 million yuan, a year-on-year decrease of 46.22%.

Steady growth in revenue, fluctuations in gross margin and increased expenses dragged down profits. During the reporting period, the company achieved overall revenue of 394 million yuan, an increase of 17.26% over the previous year. The company's management actively responds to environmental changes, actively explores high-boom downstream markets such as satellites around major products such as electromagnetic measurement systems and electromagnetic CAE simulation software, and has further improved the breadth and depth of customer coverage. At the same time, the company actively promoted business implementation and delivery, thus achieving a steady increase in revenue. During the reporting period, the company's revenue growth was mainly contributed by the electromagnetic measurement system business. Among them, revenue from products such as radar scattering cross-section measurement systems for stealth equipment and phased array calibration measurement systems for satellites increased dramatically. The company's comprehensive gross margin in 2023 was 33.84%, down 7.99 percentage points from 2022. The main reason is that the hardware cost for settlement of some projects during the reporting period was high, which led to a decline in gross margin compared to the same period last year. In addition, the company increased investment in R&D and expanded the technical team for products such as CAE simulation software and radar scattering cross-section measurement systems for stealth equipment. The resulting increase in expenses also led to a decline in profit levels.

Stealth+satellite measurement systems have grown dramatically, and the development of phased array prototypes is awaiting orders. In 2023, the company's electromagnetic measurement system business achieved revenue of 318 million yuan, an increase of 32.07% over the previous year, becoming the main contribution to revenue growth. Among them, revenue from products such as radar scattering cross-section measurement systems for stealth equipment and phased array calibration and measurement systems for satellites increased dramatically. During the reporting period, the company's measurement system orders for the satellite sector increased rapidly year on year, and successfully developed many new customers in the satellite field. Revenue from the electromagnetic field simulation analysis and verification business fell 11.30% year-on-year. During the reporting period, the company promoted the core product, the 3D electromagnetic simulation software RDSim, and achieved good order and revenue growth, but revenue from complex electromagnetic environment simulation software and semi-physical simulation systems declined due to environmental reasons. Revenue from the general testing business fell 45.60% year on year, mainly due to technical barriers and relatively low gross margins in this business. The company focused its market development on core business sectors such as electromagnetic measurement systems and electromagnetic simulation analysis and verification, while the business in this sector contracted. The phased array product business did not achieve revenue, but many prototype R&D tasks undertaken by the company were completed and technical goals were achieved during the year, laying a solid foundation for obtaining batch orders.

R&D investment continues to increase, and a low-altitude economy+low-orbit satellite track is being laid out. In 2023, R&D investment totaled 51 million yuan, an increase of 14.02% over the previous year. 4 new domestic patents were applied for, and 13 new domestic patents were added. By the end of the reporting period, the company had obtained 42 domestic patents and 98 software copyrights. The key advantage of the company's electromagnetic field simulation analysis and verification, electromagnetic measurement systems, phased array products and other businesses is algorithm technology. Among them, the electromagnetic measurement system business is mainly aimed at high-end manufacturing industries such as special applications, satellites, communications, and automobiles, and there is also a wide range of application space in various emerging fields such as the low-altitude economy. Currently, emerging industries such as satellite communications, intelligent driving, and the low-altitude industry are developing rapidly, and the application scenarios of the company's electromagnetic simulation and measurement products are constantly increasing. During the reporting period, the company carried out a number of ongoing research projects in the fields of low-altitude economy and low-orbit satellites, such as research and development of key hardware and automation equipment for electromagnetic measurement systems, research on special detection systems for low-orbit satellites, and research and development of multi-mode common aperture integrated antennas, all of which are at the advanced level in China and have broad market application prospects.

Self-developed domestic RDSim software, domestic replacement volume can be expected. As the most technically difficult field of R&D and design industrial software, CAE has an extremely long R&D cycle and extremely high technical barriers. Currently, CAE software is mainly used in high-end manufacturing industries such as special applications, satellites, communications, automobiles, etc., and there is extensive room for expansion within the manufacturing system.

The domestic CAE software 3D electromagnetic simulation software RDSim independently developed by the company is an excellent industrial software product of the Ministry of Industry and Information Technology. During the reporting period, the number of customers and potential customer groups for the company's CAE products continued to expand, and successfully developed many new customers. The new customers were mainly distributed in the fields of ships, satellites, automobiles, etc. At present, the overall penetration rate and degree of localization of China's CAE software market are low. As the country attaches increasing importance to R&D and design industrial software such as CAE, and the continuous increase in the autonomous requirements of national strategic industries such as special fields, domestic CAE software vendors, represented by companies, are expected to catch up with mature foreign manufacturers at an accelerated pace.

Investment proposal: The company has long focused on independent development and application of electromagnetic simulation and measurement technology. It has built three business segments: electromagnetic simulation verification, electromagnetic measurement systems, and phased array products. At the same time, it has extended the layout of low-altitude economy and low-orbit satellites. The company is expected to benefit as demand from the main business is released and new business is launched. We forecast the company's 2024-2026 revenue of 4.94/6.06/729 million yuan, a year-on-year increase of 25.2%/22.7%/20.4%, net profit to mother of 0.65/0.85/109 million yuan, an increase of 139.2%/31.2%/28.7% year-on-year, corresponding EPS of 0.89/1.17/1.50 yuan and PE of 34.5/26.3/20.5. The first coverage gave it an “increase” rating.

Risk warning: New product development falls short of expectations; business development falls short of expectations; market competition intensifies, etc.