2024 may become the first year of low-altitude development, and information platforms are the key foundation

The low-altitude economy is a comprehensive economic model driven by various low-altitude flight activities of various manned and unmanned aerial vehicles, and radiation drives the integrated development of related fields. In December 2023, the Central Economic Work Conference proposed the construction of emerging industries such as the “low-altitude economy”. The low-altitude economy was first included in the government work report in March 2024, and 2024 will be the first year of China's low-altitude economic development. According to data from the Civil Aviation Administration, the scale of China's low-altitude economy will exceed 500 billion yuan in 2023; it is expected to reach 2 trillion yuan in 2030; and it is expected to hit 3.5 trillion yuan in 2035.

Low-altitude information infrastructure will become a key foundation for industrial development and is expected to be the first to benefit. We believe that the development of low-altitude aircraft such as drones and eVTOLs will greatly increase the complexity of information-based management such as route management, flight equipment management, and data communication, which is expected to increase the value of air traffic control systems. Furthermore, based on the promotion of low-altitude applications in various fields such as tourism, fire, inspection, agriculture, etc., the scope of downstream construction entities is also expected to expand drastically; we expect that low-altitude infrastructure such as flight service platforms will be the first to be implemented in the low-altitude industry and the vanguard driving the trillion-dollar market.

The three major businesses are growing steadily, and the layout of the low-altitude economy is expected to open a new growth curve. The company was founded in 1988, backed by CLP Electronics, and is CLP's main window and platform for the consumer goods market. Its main business includes traffic management in civil aviation, urban road traffic management, and urban governance. The revenue of the three major businesses in 2023 was 5.51/5.03/511 billion yuan, respectively.

① Civil aviation management business: Mainly control and command systems, of which air traffic management accounts for 60%. According to Sansheng Consulting data, as of December 2022, the company's air traffic control automation system market share was 42%, leading the country. According to the company's announcement, China will plan to add large-scale regional control centers ahead of schedule on the basis of the existing 8 large-scale regional control centers, including Beijingguang. Construction of a large number of key air traffic control projects will begin one after another, compounding the upgrade and renewal requirements of the first batch of domestically produced automation systems, which will drive a rapid rise in investment in China's air traffic control system. In terms of low-altitude economy: The company is deeply involved in air traffic services, low-altitude flight service informatization, etc. In 2020, the company built the first Class A flight service station in Jiangsu Province and undertook the construction tasks of general aviation airports centered on flight service stations in Xuzhou, Jiangsu, Hefei, Anhui, etc.; in 2022, the company won the bid for projects related to the low-altitude flight service simulation and verification platform. As a leading enterprise in the localization of civil aviation management, the company strives to become the main force in industrial development in the construction of a national low-altitude intelligent service system.

② Road traffic management: The company's products and services cover more than 300 regions across the country, build quality projects in large megacities such as Beijing, Chongqing, and Nanjing, and explore overseas markets such as Kenya, Zambia, Cuba, and Belarus; it is on the “2023 Traffic Signal Controller Industry Annual Shipment Volume List” selected by Saiwen Transportation Network.

③ Urban governance: China's smart city, public credit digitization, and emergency equipment industries are growing steadily; the company is also actively responding to the “Data Factor X” initiative to accelerate the layout of the data element business.

The compound growth rate of 2019-2023 performance reached 38%, with a steady rise in profitability. In 2023, the company achieved revenue of 1,676 billion yuan, a year-on-year CAGR of 13%; the company's net profit in 2023 was 132 million yuan, up 48% year on year, and the 2019-2023 CAGR was 38%; gross margin in 2023 was 28.21%, +0.58% year over year; the company mainly targets G-end customers, with the top five customers accounting for 22.85% of revenue in 2022. The main customers include the Civil Aviation Administration and CLP etc.

Profit forecast and investment rating: The company is the only listed company within China Telecom's 28 systems. The three major businesses are growing steadily, and the low-altitude economy is expected to create a new growth curve. The company's net profit for 2024-2026 is estimated to be 1.61/1.98/243 million yuan, EPS 0.98/1.21/1.48, respectively. The PE corresponding to the current stock price is 91/74/61X, respectively. Based on the current valuation level, it was lowered to an “increase in holdings” rating.

Risk warning: Technology research and development risks, loss of technical personnel, risk of macroeconomic fluctuations, risk of increased industry competition, low altitude economy industry development falling short of expectations.